In this article, I’ll discuss the characteristics that define a strong LBO candidate, but before proceeding further, you may want to review my previous article on “Leveraged Buyout: An Overview”.

During the due diligence process, the financial sponsor evaluates the characteristics of an LBO candidate (including its strengths and risks). Most of the time, an LBO candidate will be one or combination of the following, but irrespective of the situation, the target becomes a LBO opportunity only if it can be acquired at a price and using a financing structure that generates acceptable returns with a viable exit strategy.

• Non-core or under-performing business unit of a large enterprise
• Distressed company with a turnaround potential
• A public company that is perceived as undervalued
• A public company that is considered as a high growth potential but not being exploited by its current management
• A solid performing company with a compelling business model, defensible competitive position and strong growth potential. This may also tally with the above point
• Companies in fragmented markets that can be consolidated into a single entity with higher size, scale and efficiency. This is called roll-up strategy.

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