What characteristic would make a target company a good candidate for a leveraged buyout (LBO)?

A company that is a good candidate for a leveraged buyout (LBO) typically exhibits highly predictable cash flows that can reliably service debt. The essence of an LBO involves using a significant amount of borrowed funds to acquire the company, and the ability to sustain debt payments is crucial for the success of this strategy. Predictable cash flows assure lenders that the business can meet its debt obligations, providing confidence in their investment.

This characteristic is particularly appealing for investors because it lowers the risk associated with the leveraged capital. Investors seek businesses with stable revenue streams, often derived from established market positions, consistent demand for their products or services, or a strong operational efficiency. These qualities not only enhance the feasibility of managing debt but also foster a greater chance of generating returns after the acquisition.

While volatile cash flows or unpredictable revenue models might suggest potential for high rewards, they also elevate the risk profile significantly, making them less attractive for LBOs. Additionally, high levels of existing debt would strain a company's ability to take on new debt and manage existing obligations, again making them less suitable for leverage in an LBO context. Therefore, the strength of predictable cash flows is central to the assessment of a company's viability for an LBO.