Buyout
Also known as Leveraged Buyout, LBO, PE Buyout, Sponsor Buyout
A buyout is an acquisition of a controlling stake in a company by a private equity firm, typically funded with a mix of sponsor equity and debt secured against the target's cash flows. The target services the debt out of its own EBITDA after close.
In depth
A buyout transfers control of a company to a private equity sponsor. The sponsor contributes equity from its fund and arranges debt against the target's cash flows. Senior debt sits at the top of the capital structure, followed by mezzanine and unitranche layers, with sponsor equity at the bottom absorbing first losses. The debt is held by the target after close, so the company services interest from its own EBITDA.
The leverage ratio drives both return and risk. Bain's Global Private Equity Reports show debt-to-enterprise-value moving with the cost of capital: roughly 50% in the mid-2010s zero-rate era, drifting toward the 30-40% range when borrowing costs rose, with debt-to-EBITDA following the same shape. The mechanism is simple: at higher all-in cost of senior debt, the same EBITDA services less principal, so sponsors put in more equity to clear underwriting.
For a venture exit, a buyout is one of three financial routes (alongside strategic M&A and IPO). It fits companies that have crossed into predictable cash flow but lack the public-market readiness or strategic urgency for the other paths. A PE buyer prices what the cash flow and exit assumptions can support, which sets a floor that strategic premiums sometimes exceed and IPO valuations sometimes undercut.
Why it matters
The buyout exit gives a venture fund a clean break: full cap table reset, cash to LPs, no lockup, no escrow on equity consideration (escrow is on representations only). For late-stage funds and growth-stage portfolios, the PE bid is often the realistic alternative to a sale below preference. It is a floor, not a ceiling.
It also reshapes the company. PE owners install new governance, frequently change leadership, and run operational improvement playbooks against a defined hold-period EBITDA target. Founders considering a buyout exit should understand they are selling to an owner with a defined timeline and a clear thesis on what they will change.
Worked example
A growth-stage SaaS company at $40M EBITDA is acquired by a PE sponsor:
| Source | Amount | Share of EV |
|---|---|---|
| Senior debt (5x EBITDA) | $200M | 50% |
| Mezzanine debt | $40M | 10% |
| Sponsor equity | $160M | 40% |
| Total enterprise value | $400M | 100% |
Implied EBITDA multiple at entry: 10.0x. The sponsor underwrites a five-year hold:
Entry EBITDA: $40M
Year 5 EBITDA (8% growth): $58.8M
Year 5 exit multiple: 10.0x
Year 5 enterprise value: $588M
Debt paid down to: $150M
Year 5 equity value: $438M
Sponsor MOIC: $438M / $160M = 2.7x
Sponsor IRR (5 years): ~22%
The exiting venture investors collect cash at close in the $400M enterprise value waterfall. The PE sponsor then takes the operational risk of growing into the $438M equity value at exit.
Frequently asked
How is a buyout different from a venture acquisition?
Buyer type and capital structure. A buyout is led by a financial sponsor (PE firm) using leverage. A strategic acquisition is funded with the buyer's balance sheet for operating reasons. Buyout sponsors underwrite to a target IRR over a three- to seven-year hold; strategic acquirers underwrite to synergies and competitive positioning.
How much leverage does a typical buyout use?
It varies with the interest-rate cycle. Bain's Global Private Equity Reports have tracked debt-to-enterprise-value drifting from roughly 50% in the mid-2010s to the 30-40% range when borrowing costs rose, with debt-to-EBITDA following the same path. The point to internalize is that leverage is the lever sponsors pull when rates support it and pull back from when they don't.
When does a buyout exit make sense for a venture fund?
Growth-stage companies that have stable cash flow but no clear IPO catalyst. A PE buyer can pay a defensible price using leverage and exit the existing cap table cleanly. The trade-off is that PE buyers price to a target return, which usually means lower multiples than a strategic premium would deliver, but higher certainty of close.
What is a secondary buyout?
Sponsor-to-sponsor sale. One PE firm sells the company to another PE firm, who runs the playbook again with fresh capital, fresh debt, and a new hold period. Secondary buyouts are now a substantial share of PE exits, used when the public market is closed and strategic appetite is thin.
What's the difference between an LBO and an MBO?
An LBO is a leveraged buyout by any financial sponsor. An MBO (management buyout) is a buyout led by the existing management team, who roll equity into the post-deal entity, usually backed by a PE sponsor and bank debt. An MBO is one specific structure within the broader LBO category.