Leverage
What It Means
In the context of an Acquisition, Leverage refers to the amount of debt capital used to finance the transaction.
Why It’s Important
Debt is an important and necessary part of most Acquisitions, however, it represents a source of risk. Unlike equity financing, debt must be repaid within a predetermined period of time and those payments are expected to be made from the company’s Free Cash Flows. Should the company find itself in a position where it is unable to meet those Debt Service requirements, it risks defaulting on the debt. The more Leverage a transaction relies on, the more risk it carries.