Basic leveraged buyout (LBO) | Stocks and bonds | Finance & Capital Markets | Khan Academy

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The mechanics of a simple leveraged buy-out. Created by Sal Khan.
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Finance and capital markets on Khan Academy: Private equity firms often borrow money (use leverage) to buy companies. This tutorial explains how they do it and pay the debt.
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Опубликовано:

12 сен 2024

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Комментарии : 192

@Fashionarily 7 лет назад

Wow! You know everything! Lol Im pretty sure you are the one who taught me Photosynthesis and Cellular Respiration years ago when I was in college. Now I land on this topic years later and you are teaching me this! Amazing! 😂😂

@cclar777 2 года назад

Lmao, he taught me calculus back in 2018!!!

@khanacademy 13 лет назад

@Frostpako Actually most corporate debt is interest only and you pay most or all the principal at once (usually taking out a new loan to pay the principal on the old one). Also, principal payments do not get accounted for on your income statement.

@thosantos88 10 лет назад

Thank you for this very simple explanation!

@fpxdaxbe 12 лет назад

I have thoroughly enjoyed reading your comments, sir. As an 18 year old (accounting) college student trying to make sense of everything financial, I would love to have a smart, good-American advisor like you. Many thanks!

@rewardx Год назад

You're 28 now. I hope life is going good for you.

@LamarFrancis 8 лет назад

Thanks for making it so simple. Wasn't boring. Had colors to coordinate. Great.

@marcelolopes5684 3 года назад

Hi, shouldn't we consider the payment structure on this loan? If we consider a 10 year loan, cash flow cushion is negative since the first year. I understand the minimal payment term which would allow such structure is 25 years, isn't it?

@dzidzaichidumba5435 3 года назад

This is how Manchester United F.C was bought, very intresting

@m.a6141 3 года назад

CAME TO HERE ALSO FOR THAT

@AbbasAdejonwo 3 года назад

Literally just watched a video on how the Glazers bought MUFC and came here to understand the deal structure more😂

@philiphan6673 3 года назад

Exactly what brought me here as well lol

@lifecrackaca2022 11 месяцев назад

This guy teaches just everything. Wow. Great job.

@MatthieuVlogs 6 лет назад

Wow, what a beautiful and concise explanation. It's great to see how LBOs can be so attractive; it's also interesting to note how they can go awry for the purchased company when the income isn't as consistent as previously thought (Toys-R-Us). Thanks for sharing!

@cyrilsurendar738 3 года назад

Well explained, so simple and concise. Thank you !!

@dimitriskourti2634 2 года назад

Generally, good basic explanation. Although some things are left out. How you conclude that is a good business deal, if you are left with 400k income and you still have to pay the principal? In how many years you will repay the debt if you assume that you only pay the interest of the loan? But the basic explanation of LBO is ok.

@Skulluuzz 2 года назад

I think this is a VERY important question

@JP1234815 2 года назад

The great thing about it being an LBO is if the business increases it's net income year on year - that will be magnified by leverage!!

@Andrewcoulibaly 2 года назад

My big question is it true that firms need to disclose financial information to their lender before being approved for leverage for their buyout? Does that disclosure effect their interest rate or how much money is lended for the buyout?

@klothus9960 2 года назад

thats a really good video, even eleven years latter it can return me some knowledge for me

@azzz3709 2 года назад

Great video. Explains the structure clearly and simply.

@rahul27668 5 лет назад

Thanks....I was so confused reading this from cfa books...this made LBO Cristal clear

@tushya2088 2 года назад

What about the principal to be paid to the bank? That is also an expense to me and shouldn’t it be decreased from the income?

@Nanamahjiyc 10 месяцев назад

The principal would be the $9MM you borrowed. Principal repayment does not affect net income.

@ncochran01 3 года назад

This is pretty interesting, but the problem is if that business starts to decline, the debt/interest becomes a problem right? It seems like we hear about these big deals (purchase of a large chain from equity) and 5 years later the file for bankruptcy. What is the major downfall of the LBO?

@DataBeach Месяц назад

Thanks for this clear explanation of LBO. I don't quite think the deal is a good one for you even at 40% RoI in year 1. Your debt to the bank is not just 10% interest but interest + $9m borrowed principal. It would be nice to see future cash flow of the business showing how the $9m gets repaid without hurting the yearly net income of the business.

@Jack7967 11 лет назад

Hmm. OK. That makes sense.(I think; I was a science major so I had to look up most of that) I can see why sal dumbed it down a lot as an introduction video.

@financekid3163 7 лет назад

Excellent introductory video, for anymore looking to learn more about the LBO transaction and how different parties are involved in the transaction, check out the LBO video on my channel. Let me know if you have any questions!

@M4rtingale 13 лет назад

@Frostpako The terms of the loan can be negotiated and the size of the installments varies from business case to business case. You cannot conclude based on the video whether or not the installments are larger than the net income.

@SabrinAlzahrani 3 года назад

why do we pay the whole interest rate in year 1, also what about the principle payback?

@andrecamacho7660 Год назад

10% every year .... not 10% of total period of loan

@rohitxess1955 3 месяца назад

Wow, this is the easiest explanation out there.

@ramonandre2969 8 лет назад

THE KEY TO ALL THIS IS PICKING COMPANIES WITH GREAT ASSETS AND GENERATES INCOME..THAT WILL ABLE A SWING LOAN..

@BushwickSounds Год назад

Wow those final 10 seconds blew my mind lol

@pattipilot 8 лет назад

Thank you for sharing this. I really appreciate your videos. Keep up the great work!!

@honggwan. 2 года назад

Thank you for the video! It was easy to understand.

@KazenoniKakuremi 11 лет назад

I am not sure but I think the return may be even higher, as you will need to add back the tax shield you received from the interest payment...someone correct me if I am wrong

@KazenoniKakuremi 11 лет назад

Yes you are right, the problem is when you goto 100% debt, the interest payment wont be the same, as the bank now is taking more risk, because there is no 1M equity buffer to cushion losses

@NotMyWillButThineBeDone 6 лет назад

Makes so much sense. Thank you!

@jonveals33 4 года назад

This is a great simple explanation.

@abdulmuhaimin5861 2 года назад

wow..well explained ..thank u

@tteu123 10 лет назад

This. This is awesome.

@KoalaBearWarrior 13 лет назад

Man these are so great! Keep on posting these vids!!!!

@clay9984 2 года назад

Great explanation

@Jack7967 11 лет назад

So, for this example, what kind of principal payment do you think we'd be looking at? I can't imagine it being high enough not to make it worth it because you are receiving an annual income. You'd get back the $1 Mil in a couple of years and from there on would be making money right?

@nikkiklijn2722 Год назад

thanks that makes sense now!

@as3sfv99ew9 13 лет назад

this was pretty helpful - thanks bro, you did it again!

@tarekalsherif57 2 года назад

Awesome! Thank you,

@rjstn9 4 года назад

great video, very clear thank you

@luiohh 11 лет назад

I've always wondered - why it is the target company which is saddled with the debt used to fund the acquisition, and not the purchaser company itself? Shouldn't it be the purchaser who borrows from the bank and adds in some of the purchaser's own money to buy over the target?

@cavedshukla4778 2 года назад

It same thing I was thinking throughout the whole video. How it's the debt of the target company when debt is taken by acquiring company.

@dimitriskourti2634 2 года назад

@@cavedshukla4778 Probably because it is in the definition of LBOs, the target company is used as collateral, under mortgage. The investment itself is the collateral, so it is one evaluated for the loan. The loan is restricted to the target company, limited liability loan(somehow), if something goes wrong, the damages are restricted to the investment only.

@sumitagarwal3788 2 года назад

What about the calculating the fee or cost of management fee of target

@ups427 11 лет назад

I mean i wish we could get just interest only stuff, but banks don't allow that. in theory you could do a deal with all mezzanine rates, but they are 12-15% + warrants so about 20% per year. Thats way to high. Senior debt right now is 4-6*%, so its a drastic difference in cost of capital.

@Lehmann108 12 лет назад

That is exactly what happens! All assets including pension funds are open to the creditors.

@pornpimolwongsiri4672 5 лет назад

Thank you so much!

@pratikthakur3562 Год назад

How would they return principal amount?

@gkollias14 4 года назад

what are the total taxes paid before the buyout and after the buyout?

@owenconnelly5975 Год назад

Very well done

@arghonandi6818 3 года назад

great video!

@sabreenabdullajirrow7566 4 года назад

This was amazing thank you

@TheJoezaidan Год назад

One Question, you don't pay back the $ 9 million loan ?

@Vattic2 12 лет назад

Hey! im not good speaking english but your video was useful whatever! :) thx!

@ntcuong01ct1 2 года назад

Dear Friends, I have a question: 1/ When and Why we should use LBO (Leveraged Buyout) to do M&A deal?. Thank you.

@ramajonnalagadda2993 2 года назад

Lbo’s are generally for private companies, m&a occurs for public securities there is more to it but this is a start

@brucelee2780 9 лет назад

Amazing! Thank you so much!

@thekraken1000 13 лет назад

American Hero Right here

@dseer13 5 лет назад

so they liquidate the assets if they turn out they don't have the money to pay back the principal or if the business isnt generating the amount of income one would have hoped? Thats when companys go bust and employees start losing their jobs.

@addydaddy1100 11 лет назад

ok... even still if I raised my debt... still I they will leave atleast something to me... the point I am making is none of my equity I have invested.. but I still earn a profit...

@M4rtingale 13 лет назад

@TheHumanAgenda (con'td) 1.2) The company or investor DO have the available funds, but are unwilling to lock p the money in a single project. As a result, the rest of the money is freed up for other investments or furthering the one already in business. (con't)

@M4rtingale 13 лет назад

@TheHumanAgenda (cont'd) 2) A 40% return is better than a 10% return. If you are unable to see this, not even Sal can help you understand. If 10 people lever up their investments, they get a total return among them of 4m, compared to 1m if they did not lever up. Everybody wins!

@MrCrowbarFace 13 лет назад

wow thanks very informative!

@gauravtejwani2798 2 года назад

Amazing 🔥

@richabazgain5847 6 лет назад

The best explanation (y)

@mar79379 6 лет назад

what software do you use to draw?

@clayandrews4905 7 лет назад

The $400k is not the ROI. It's the firms new net income. So yes there is a 40% return if you are comparing net income over investment, however the investor will only claim a portion of that income if they are interested in growing the firm or refinancing, it may be possible to reach a 40% return after several years if the loan is refinanced and structured to maximize investor earnings potential.

@xWhiteRice 6 лет назад

This may be 6 months old but I disagree. as a 0 growth firm, all of that net income would theoretically be pushed out as dividends. And as the sole owner, congratulations on your 400k annual payday.

@Rocksteady365mac 6 лет назад

So what about paying the investment bank back the £9m? I assume it's when you sell the business to another private equity firm and use that money?

@melynimason4216 8 лет назад

Excellent.

@woo216 13 лет назад

thanks

@kevinesteves5530 11 лет назад

so.. You a a partner in a private equity fund and you are looking at a BASIC leveraged buyout video.. Must be a very good partnership..

@mattmatt4916 7 лет назад

What was that at the 2.45-2.47 minute? Some squeezing the Truth in I SEA.. lol

@KazenoniKakuremi 11 лет назад

yea, you are absolutely right, its the same as 'margin lending' where you borrow a lot of money to trade with, so none of your own equity, but the interest payments are high...if you can find a return that is far greater than those payments, then you can definitely go for a 100% debt financed model

@andrecamacho7660 Год назад

who will finance a 100% your deal ? ... unless you are a known business man.. forget it

@neversayjello 7 лет назад

how do credit spreads affect a LBO??

@MrCruelStreak 9 лет назад

thank you sal ^-^

@Amira6262 13 лет назад

Thanks, Khan:)

@ups427 11 лет назад

well you're mixing it up a bit. Typically LBO senior secured debt is 36month to 48 months in term. this is dictated by banks, as a fund we don't have any say in this. we want a longer term they want a short term. No bank would allow you to do this deal at 10x ebitda without putting in 4-5x ebitda of equity. then there would be interest only 1-2x mezz and 3-4 senior which is amortized.

@andrecamacho7660 Год назад

not 10x ebitda.... is worse then that ... is 10x net income

@sumitagarwal3788 2 года назад

Excellent explanation. 400000 return on 1 million being called not so sleepy return

@eh1114 11 лет назад

ya, but if you already have money why would you want to borrow more money that requires you to pay interest?

@addydaddy1100 12 лет назад

What if i take whole of the money as loan which is 10 million, I will pay 1 million interest which will be deducted from pretax income leaving 500K. Now if I deduct 1/3rd of the tax which leaves aprrx 360000 as Net Income without even investing a single penny. Correct me if I am wrng.. Just curious if its right..?

@adamgrimsley2900 3 года назад

Nice

@ups427 11 лет назад

hey im a partner in a private equity fund. the idea that lbo senior debt is interest only is 100% false.

@David-f9z8e 4 года назад

hey how wealthy are you?

@samarthsharma6993 Год назад

Beautifully explained .... but isn't 1/3rd of 600 k = 200k ?

@daan2377 Год назад

They pay 1/3rd so they keep 2/3rds so 400k

@jxsilicon9 13 лет назад

@TheHumanAgenda Banks don't like running companies or owning real estate.

@randombarbarian5637 3 года назад

Maybe I'm missing something here, but did you forget to pay the principle of the loan? This should come out of the $400k/year. You were only calculating the interest payment of the loan.

@inmortal009 9 лет назад

Wooah amazing

@weeeee880 6 лет назад

Is that you vladtv???!

@28gbb 12 лет назад

good explanation but no bank would give you 90% leverage, maybe 50% if you are lucky on a small private company - if it has hard assets.

@markolivito2167 2 года назад

But you forgot the principal payments on $9mm loan!

@fleshcookie 9 лет назад

interesting.

@shabeelath 5 лет назад

pretax income of 1.5 million only you took there isn't a need of taking another 1 million and 9 million we took? and how did 400 k came please explain it sir

@PedroJardo 2 года назад

Wait, but why the money goes into the business? Isnt that a Cash out transaction?

@jxsilicon9 13 лет назад

@TheHumanAgenda They don't like taking on risk. And they don't want to run a business or deal with real estate. They will just end up selling it at probably a lost. If you have a triple A rating or lots of collateral. Sure they will give you a good deal.But most deals are funded through other sources along with banking or instead of bank loans.Like a private equity firm already has millions,billions in capital from investors.But there are plenty of financial sources.

@pslink6437 7 лет назад

Who on earth would buy a business for 10 times EBITDA.

@chiragpatel849 6 лет назад

just an example

@SmartyPFc 6 лет назад

Most private equity firms...

@secondavenger9775 5 лет назад

IBM apparently would for Red Hat...

@mario34129 5 лет назад

You mean 10 times net income?

@gkollias14 4 года назад

net income is not EBITDA

@iamjacquesbarjon 12 лет назад

so what happens to you if when you take over the company, the company goes belly up after the second year? the bank is gonna come looking for the 9million right? how do they get paid? do you have to raid your company's pension fund and start firing workers?

@M4rtingale 13 лет назад

@TheHumanAgenda Wow, a lot of economic illiteracy going around here. 1) What prevents an indebted company from reinvesting its proceeds? Virtually no company these days operate without debt; in fact, debt makes possible ventures otherwise impossible because not a lot of people have or is willing to pay out of pocket the expense. 2) The word "leverage" is meant to be taken outright; leverage magnifies the invested amount - the profit is quadrupled as a result, in this case.

@samsonsoturian6013 Год назад

Of course, the obvious danger of 10x leverage is that if business slums a little, you is in the hole

@M4rtingale 13 лет назад

@TheHumanAgenda I'm sorry, but that's not how demand works - especially not when we're talking million-dollar corporations. The value of the firm is carefully calculated (be it on a stand-alone basis or with synergies taken into account) by potential purchasers. What loans generates is liquidity. Liquidity in markets does not drive prices to explode or otherwise create inflation; liquidity results in prices being MORE accurate to the true value/NPV, and it helps attract the best people/managers

@jxsilicon9 13 лет назад

This is an interesting presentation. But nobody structures leverage buyouts like this. Well not anyone that knows what they're doing. You borrow less than the assets. So you can actually sell the assets to payoff the loan. Or you bring in other investors since banks only lend to about 10% of deals.

@andrecamacho7660 Год назад

who told you that 10% thing ? thats so untrue

@GddbHdhd-gb4wl 2 дня назад

Rodriguez Mark Thomas Charles Martinez Margaret

@keviniqbalrodriguez1706 3 года назад

Can someone explain what happens to the remaining $9 million owed in this case? I always have difficulty conceptually grasping this part…

@wronggg 2 года назад

@@BlakeRees Completely wrong. You'll be paying $900k in interest PLUS the principle which will be significant too. Your true take home, cash bottom line will be much smaller than this video portrays (although you'll be building equity value too.)

@M4rtingale 13 лет назад

@TheHumanAgenda If you were able to produce a worked-though example of your claim, maybe I'd consider what you're saying. Until then I'll have to regard your comments as nothing more than empty claims. If, for instance (as Sal also mentions), the loan is a bullet loan (i.e. principal repayment in one installment at maturity), there are no gradual repayments. But it seems you've figured it all out; but what makes you smarter than virtually every single company that disagrees with you?