Deleverage

To pay off debt,such that a company trading at four times cash flow uses operating cash flow to deleverage and pay down debt, making them less leveraged and notionally safer as an investment.

Whatever.com has $30 million in EBITDA, or cash flow. It has $120 million in debt, on which it pays 6% interest, or $7.2 million a year. The company still keeps over $20 million in cash profits after "everything," and it uses that cash from operations to deleverage, or pay down its $120 million in debt. After three years, it's cut the debt load in half to $60 million, now with interest payments of just $3.6 million. It is likely a much financially safer or more credit-solid company than it was two turns of debt ago.

Related or Semi-related Video

Finance: What is MBO v LBO?17 Views

00:00

Finance allah shmoop What is an m b o versus

00:06

and lbo Okay let's Get their letters right first And

00:11

n b o is a management buyout Ngos on their

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own aren't all that common But in a given company

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inside management might own same thirty percent of the stock

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They might partner with another investor who owns a twenty

00:25

percent or more And then they might borrow say fifty

00:28

percent in debt and take the company private fixit pivot

00:33

tweak live with bad quarters for a while without wall

00:36

street yelling at him And then they might sell the

00:38

company cell or whatever Maybe take it public again will

00:41

The distinctive feature here is that the company is already

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in place Management is doing the deal and more often

00:48

than not essentially all the net worth of the management

00:51

will be in the company leveraged when the embryo is

00:54

completed And that level of financial commitment really keeps the

00:58

team focused Because if things don't work out when they

01:00

lose everything your house their car in there Slinky collection

01:04

All right next up we have an lbo which is

01:06

a leveraged buyout and it just refers to the practice

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Of taking on debt to buy a company sometimes with

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same management sometimes with different players like an lbo is

01:17

a bigger venn diagram set than the embryo thing Well

01:20

in an lbo the same basic thing happens But in

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a whole bunch of cases management is tossed out The

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company wouldn't be quote vulnerable unquote to an lbo Had

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management done a good job and kept the company trading

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or valued at a high multiple where it would then

01:36

be almost impossible to make the risk reward scenario workout

01:39

in taking out a whole lot of debt to get

01:41

company bought and then turned in the right direction Instead

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new management in lbo is usually brought in and resembling

01:47

moses noah and other biblical characters and their perceived greatness

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and there's a stone tablet with a new set of

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commandments Thou shalt be profitable or something like that Arguments

01:57

are had at the board level and eventually either the

01:59

lbo works and the company has taken public again or

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sold for a big price Or it isn't and wrath 00:02:06.63 --> [endTime] has had

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