What is a consideration for a leveraged buyout (LBO)?

A leveraged buyout (LBO) involves acquiring a company using a significant amount of borrowed money, which increases the financial risk associated with the transaction. The primary consideration in an LBO is the capital structure that incorporates a higher level of debt relative to equity. This additional leverage can enhance the potential returns for equity holders if the investment performs well, but it also amplifies the risk of financial distress or bankruptcy if the company fails to generate sufficient cash flows to service the debt.

The use of leverage means that the company is obligated to meet regular interest and principal payments, placing additional stress on its financial situation. Thus, the increase in risk due to additional leverage is a critical consideration for investors evaluating an LBO opportunity. This heightened risk demands careful analysis of the target company’s cash flows, stability, and growth potential to ensure that it can sustain the added debt and deliver attractive returns on investment.

The other options do not represent fundamental considerations for an LBO strategy. For instance, increasing available capital is not a likely goal in an LBO since capital is primarily raised through debt rather than looking for new equity. Pursuing non-profit businesses typically contradicts the profit-driven motives that underpin LBOs, where the aim is to garner returns for investors.