Why is a clean balance sheet important for a target company in an LBO?

A clean balance sheet is vital in a leveraged buyout (LBO) context as it minimizes the risks associated with new layers of debt. When a target company has a clean balance sheet, it typically means that it has low existing debt, manageable liabilities, and a strong asset base. This situation can lead to a greater ability to absorb additional debt without significantly increasing the risk of default.

In an LBO, the acquiring firm typically uses a substantial amount of debt to finance the purchase. If the target company already has significant liabilities, the additional debt may lead to financial strain, making it more challenging to meet interest payments and principal repayments. A clean balance sheet, therefore, not only enables the company to take on more leverage safely but also ensures that cash flows can be reliably used to service that new debt, promoting financial stability post-acquisition.

Other answer choices do not directly address the primary concerns of an LBO structure. Immediate layoffs may be considered as part of operational strategies but do not relate specifically to the balance sheet's cleanliness. Raising equity quickly is more about investor confidence and market conditions than about the balance sheet status. While high future cash flows are important, they are not guaranteed solely by a clean balance sheet but rely on operational performance and market