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

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

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13 жыл бұрын

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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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Пікірлер: 178

@Fashionarily 7 жыл бұрын

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 жыл бұрын

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

@khanacademy 13 жыл бұрын

@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 жыл бұрын

Thank you for this very simple explanation!

@LamarFrancis 8 жыл бұрын

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

@lifecrackaca2022 10 ай бұрын

This guy teaches just everything. Wow. Great job.

@rahul27668 5 жыл бұрын

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

@cyrilsurendar738 2 жыл бұрын

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

@fpxdaxbe 12 жыл бұрын

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 Жыл бұрын

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

@pattipilot 8 жыл бұрын

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

@azzz3709 2 жыл бұрын

Great video. Explains the structure clearly and simply.

@klothus9960 2 жыл бұрын

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

@MatthieuVlogs 6 жыл бұрын

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!

@JP1234815 2 жыл бұрын

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!!

@jonveals33 4 жыл бұрын

This is a great simple explanation.

@NotMyWillButThineBeDone 6 жыл бұрын

Makes so much sense. Thank you!

@as3sfv99ew9 13 жыл бұрын

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

@M4rtingale 13 жыл бұрын

@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.

@Jack7967 11 жыл бұрын

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.

@brucelee2780 9 жыл бұрын

Amazing! Thank you so much!

@honggwan. 2 жыл бұрын

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

@rjstn9 4 жыл бұрын

great video, very clear thank you

@sabreenabdullajirrow7566 4 жыл бұрын

This was amazing thank you

@KoalaBearWarrior 13 жыл бұрын

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

@dzidzaichidumba5435 3 жыл бұрын

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

@m.a6141 3 жыл бұрын

CAME TO HERE ALSO FOR THAT

@AbbasAdejonwo 3 жыл бұрын

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

@philiphan6673 3 жыл бұрын

Exactly what brought me here as well lol

@tteu123 9 жыл бұрын

This. This is awesome.

@marcelolopes5684 3 жыл бұрын

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?

@KazenoniKakuremi 11 жыл бұрын

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

@pornpimolwongsiri4672 5 жыл бұрын

Thank you so much!

@MrCrowbarFace 12 жыл бұрын

wow thanks very informative!

@abdulmuhaimin5861 2 жыл бұрын

wow..well explained ..thank u

@richabazgain5847 5 жыл бұрын

The best explanation (y)

@clay9984 2 жыл бұрын

Great explanation

@melynimason4216 8 жыл бұрын

Excellent.

@nikkiklijn2722 Жыл бұрын

thanks that makes sense now!

@tarekalsherif57 2 жыл бұрын

Awesome! Thank you,

@Andrewcoulibaly 2 жыл бұрын

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?

@MrCruelStreak 9 жыл бұрын

thank you sal ^-^

@Vattic2 12 жыл бұрын

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

@arghonandi6818 3 жыл бұрын

great video!

@Lehmann108 12 жыл бұрын

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

@rohitxess1955 Ай бұрын

Wow, this is the easiest explanation out there.

@owenconnelly5975 Жыл бұрын

Very well done

@woo216 13 жыл бұрын

thanks

@Amira6262 13 жыл бұрын

Thanks, Khan:)

@ups427 11 жыл бұрын

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.

@BushwickSounds Жыл бұрын

Wow those final 10 seconds blew my mind lol

@thekraken1000 13 жыл бұрын

American Hero Right here

@Jack7967 11 жыл бұрын

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?

@gkollias14 4 жыл бұрын

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

@sumitagarwal3788 2 жыл бұрын

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

@financekid3163 7 жыл бұрын

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!

@gauravtejwani2798 2 жыл бұрын

Amazing 🔥

@inmortal009 9 жыл бұрын

Wooah amazing

@KazenoniKakuremi 11 жыл бұрын

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

@ncochran01 3 жыл бұрын

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?

@addydaddy1100 11 жыл бұрын

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...

@ramonandre2969 8 жыл бұрын

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

@mar79379 5 жыл бұрын

what software do you use to draw?

@neversayjello 7 жыл бұрын

how do credit spreads affect a LBO??

@fleshcookie 9 жыл бұрын

interesting.

@dimitriskourti2634 2 жыл бұрын

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 Жыл бұрын

I think this is a VERY important question

@kevinesteves5530 11 жыл бұрын

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..

@sumitagarwal3788 2 жыл бұрын

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

@dseer13 5 жыл бұрын

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.

@pratikthakur3562 Жыл бұрын

How would they return principal amount?

@M4rtingale 13 жыл бұрын

@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)

@adamgrimsley2900 3 жыл бұрын

Nice

@Rocksteady365mac 6 жыл бұрын

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?

@tushya2088 2 жыл бұрын

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 8 ай бұрын

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

@clayandrews4905 7 жыл бұрын

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 жыл бұрын

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.

@eh1114 11 жыл бұрын

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

@luiohh 11 жыл бұрын

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 жыл бұрын

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 жыл бұрын

@@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.

@M4rtingale 13 жыл бұрын

@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!

@SabrinAlzahrani 2 жыл бұрын

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

@andrecamacho7660 Жыл бұрын

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

@addydaddy1100 11 жыл бұрын

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..?

@28gbb 12 жыл бұрын

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.

@mattmatt4916 7 жыл бұрын

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

@KazenoniKakuremi 11 жыл бұрын

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 Жыл бұрын

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

@ntcuong01ct1 2 жыл бұрын

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 жыл бұрын

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

@weeeee880 6 жыл бұрын

Is that you vladtv???!

@shabeelath 5 жыл бұрын

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

@randombarbarian5637 3 жыл бұрын

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.

@samsonsoturian6013 Жыл бұрын

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

@simfinso858 6 жыл бұрын

Wow deal

@pslink6437 7 жыл бұрын

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

@chiragpatel849 6 жыл бұрын

just an example

@SmartyPFc 6 жыл бұрын

Most private equity firms...

@secondavenger9775 5 жыл бұрын

IBM apparently would for Red Hat...

@mario34129 5 жыл бұрын

You mean 10 times net income?

@gkollias14 4 жыл бұрын

net income is not EBITDA

@ups427 11 жыл бұрын

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 Жыл бұрын

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

@jxsilicon9 13 жыл бұрын

@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.

@jxsilicon9 13 жыл бұрын

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

@TheJoezaidan Жыл бұрын

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

@iamjacquesbarjon 12 жыл бұрын

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?

@ups427 11 жыл бұрын

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

@LordBoston123 3 жыл бұрын

hey how wealthy are you?

@M4rtingale 13 жыл бұрын

@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

@markolivito2167 2 жыл бұрын

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

@M4rtingale 13 жыл бұрын

@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.

@samarthsharma6993 Жыл бұрын

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

@daan2377 Жыл бұрын

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

@M4rtingale 13 жыл бұрын

@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?

@siu281 4 жыл бұрын

So now my slow brain finally understands what the Galzers are doing at Manchester United

@theodore123211 10 жыл бұрын

then what happened to the debt with the bank? that $9 million doesn't need to be paid back? :O

@Manutschki 10 жыл бұрын

Sell the assets and u got the money :) (usually)

@pratikthakur1191 3 жыл бұрын

Exactly..what about the principal payment??

@RomilCPatel 3 жыл бұрын

@@pratikthakur1191 It’s an interest only loan, so no principal payments.

@keviniqbalrodriguez1706 3 жыл бұрын

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

@wronggg 2 жыл бұрын

@@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.)

@jxsilicon9 13 жыл бұрын

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 Жыл бұрын

who told you that 10% thing ? thats so untrue