Leveraged Buyout (LBO)
Acquisition strategy where the buyer finances a significant portion of the price (often 60% to 80%) with debt, secured by the assets and cash flows of the acquired business.
Definition
A leveraged buyout (LBO) is an acquisition method in which the buyer uses debt as the primary financing for purchasing a business. Rather than paying the full price with their own equity, the buyer borrows a significant portion — typically 60% to 80% — and uses the business’s future cash flows to repay that debt.
In French-language Quebec documentation, you’ll see LBO (rachat par emprunt) used for the same concept.
Put differently: after the sale, it’s the business itself that generates the money needed to repay the loan taken out to buy it.
Why the LBO matters in a business sale
If you’re selling your business, there’s a good chance the buyer will finance part of the price with debt. It’s the most common structure for SME transactions in Quebec, whether the buyer is an individual, an investment fund, or even a key employee in a succession context.
The key point to understand: in an LBO, the price the buyer can pay is directly tied to your business’s ability to repay the debt. If your EBITDA (earnings before interest, taxes, depreciation and amortization) is $500,000, the bank will calculate how much debt service the business can support, and that will set a practical ceiling on the sale price.
It’s also common for part of the financing to take the form of a vendor take-back (VTB), where you, the seller, agree to receive a portion of the price over several years. That reduces risk for the lender and can help close the transaction, but it also means you carry part of the financial risk after closing.
What every seller should know
- In an LBO, the sale price is capped by your business’s cash flows — a stable, predictable EBITDA gives you stronger negotiating leverage.
- You may be asked to finance 10% to 30% of the price as a vendor take-back, especially if bank financing doesn’t cover the full amount.
- Canadian banks generally require a debt service coverage ratio of at least 1.2x, which limits the borrowable amount.
- Preparing your financial statements and demonstrating recurring revenue directly improves financing terms — and therefore the price the buyer can pay.