What does steady and predictable cash flow enable for an LBO target?

The ability to have steady and predictable cash flow is crucial for a leveraged buyout (LBO) target because it significantly enhances the company's capacity to raise debt. Lenders and investors look for consistent cash flow as it indicates that the company can meet its debt obligations reliably, which is a primary concern in an LBO scenario due to the high levels of leverage involved.

A consistent cash flow generates a sense of security for potential lenders, making them more comfortable extending credit to the company. It demonstrates that the business can maintain operations and make regular interest payments on any borrowed funds, thereby enhancing the overall creditworthiness of the company. This increased capability to raise debt can allow the LBO to utilize more leverage, thereby potentially increasing returns for equity investors.

Focusing on the other contexts: while reduced investment risk for shareholders, greater operational flexibility, and higher employee salaries may be relevant to overall business performance and strategy, they are not directly tied to the core requirement for raising debt in an LBO scenario. Steady cash flow primarily acts as collateral and assurance for lenders, which is why it is crucial for enhancing borrowing capacity.