What is a potential consequence of limited working capital requirements in an LBO?

Limited working capital requirements in a leveraged buyout (LBO) context generally refer to a situation where a company operates with minimal liquidity needs, allowing it to hold less cash and maintain lower levels of current assets like inventory and receivables. This can lead to increased cash flows being available for debt repayment.

When a company does not have to allocate a significant amount of its resources to fund working capital, it can instead use those funds to service its debt obligations. This is particularly important in an LBO scenario, where the company's ability to generate cash and manage debt is critical to satisfying the capital structure imposed by the buyout financing.

By having more cash freed up, the company is in a stronger position to meet its interest payments and repay principal on its debts, thereby reducing financial distress and improving the overall return on investment for equity holders. Thus, the consequence of limited working capital can be seen as a strategic advantage in managing cash flows effectively in the highly leveraged environment of an LBO.