Deleveraging
LBOUsing the company's own cash flow to repay acquisition debt, which converts enterprise value into equity value.
In a buyout the debt sits on the acquired company and is repaid out of its cash flow. Every euro of principal repaid is a euro that no longer stands between enterprise value and the sponsor's equity.
This is the quiet engine of most buyout returns. A business bought and sold at exactly the same multiple, with only modest EBITDA growth, can still double or triple the sponsor's equity purely because the debt shrank.
It is why cash conversion matters more than growth in candidate selection. A business that converts EBITDA into free cash flow reliably repays debt on schedule; one that must reinvest heavily does not, however fast it grows.
It also explains why WACC is the wrong discount rate for a buyout and why adjusted present value exists: the capital structure changes every year, so no single set of weights is correct for the whole holding period.
Worked example
Debt of 550 at entry, with the business generating roughly 50 a year of free cash flow after interest, all swept to repay principal.
By year five debt is 300. That 250 of repayment converts directly into equity value: at a constant enterprise value, every euro repaid is a euro more for the sponsor.
EBITDA grew only 30% over the same period, while equity grew 149%. The difference is entirely leverage.