Which of the following is NOT a good LBO target characteristic?

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Multiple Choice

Which of the following is NOT a good LBO target characteristic?

Explanation:
In an LBO, the debt used to finance the acquisition is paid back from the target’s cash flow, so you want a business with predictable, sufficient cash generation and tangible assets to back financing. High capex requirements drain that cash before debt service, making it harder to cover interest and principal and increasing risk for lenders and the deal. That’s why this characteristic is not desirable. By contrast, hard assets that can serve as collateral reduce lender risk and can support higher leverage; steady cash flows provide a reliable base for debt repayment; and a strong management team helps execute improvements and navigate financing and operations under the new capital structure.

In an LBO, the debt used to finance the acquisition is paid back from the target’s cash flow, so you want a business with predictable, sufficient cash generation and tangible assets to back financing. High capex requirements drain that cash before debt service, making it harder to cover interest and principal and increasing risk for lenders and the deal. That’s why this characteristic is not desirable.

By contrast, hard assets that can serve as collateral reduce lender risk and can support higher leverage; steady cash flows provide a reliable base for debt repayment; and a strong management team helps execute improvements and navigate financing and operations under the new capital structure.

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