A leveraged buyout is a house purchase where the house pays the mortgage. The buyer puts down a fraction of the price, borrows the rest, and the company they bought (yours) makes the loan payments out of its own earnings. Once you hold that picture clearly, everything that happens after an LBO closes stops being mysterious and starts being arithmetic.
This post is that arithmetic. Not a warning and not an attack. LBOs are a legitimate, legal, sixty-year-old way to buy companies, plenty of owners have sold into them satisfied, and if you sell your MSP there’s a decent chance the offer in front of you is one. Which is exactly why you should understand the machine before you’re part of it. Owners who understand the model negotiate better with everyone, including us.
The purchase, by the numbers
Say your MSP earns $800k of adjusted EBITDA and a financial buyer offers 5x: a $4M price. In a typical leveraged structure, the buyer might fund it with roughly $1.5M of their own equity and $2.5M of debt, borrowed from a bank or a private credit fund. Here’s the part that surprises owners the first time they see it: that debt doesn’t sit with the buyer. It sits on your company. The business you built becomes the borrower, its assets and cash flows become the collateral, and its future earnings become the repayment source.
At recent interest rates, $2.5M of acquisition debt costs something like $250k to $300k a year in interest alone, before principal. Your $800k of EBITDA now has a permanent first customer.
Why the model does what it does
Follow the incentives and the standard post-close playbook writes itself.
The debt payment is fixed, so the first priority after close is making sure EBITDA comfortably covers it. That means costs get examined immediately, and the biggest cost in an MSP is people. Centralizing the help desk across the buyer’s portfolio, consolidating tools, and trimming positions that overlap with the platform aren’t cruelty. They’re the debt schedule expressed as an org chart.
The equity return math drives the rest. A fund that put in $1.5M typically needs to roughly triple it in about five years, because funds return money to their investors on a clock. There are only three levers: grow EBITDA, pay down debt, and sell at a higher multiple than you paid. So expect price increases across the client base, expect add-on acquisitions to build size (larger companies trade at higher multiples, so bolting your $800k shop into a $5M platform re-rates your earnings on day one), and expect the whole thing to be sold again around year five, to a buyer nobody can name today.
Some funds also charge the company annual management or monitoring fees, and some take money out early through dividend recapitalizations, borrowing more against the company to return cash to the fund before any sale. These are disclosed, standard tools of the trade. They also mean the company can end up carrying more debt years after close than it did at closing.
None of this describes bad people. It describes rational actors inside a model whose constraints are set the day the deal is signed. The variation between good and bad outcomes for your team and clients is real, but it lives inside those constraints, never outside them.
What it means on your side of the table
First, understand that leverage often funds part of the seller’s risk too. Deals lean on earnouts, seller notes, and rollover equity partly because debt capacity is finite, so examine how much of your headline price is cash at close versus paper that depends on the company’s performance while it carries the new debt. A timeline’s worth of diligence makes sense on any buyer, and doubly so on the ones whose structure puts your remaining proceeds behind the bank.
Second, know that your employees and clients will live inside the model’s constraints after you leave. If continuity for them is one of your goals, the buyer’s capital structure is a continuity question, and you’re allowed to ask about it directly.
Which brings us to the questions. Put these to any buyer, and we mean any, because you’ll learn as much from how they answer as from what they say:
- How is this purchase being funded, and how much debt will the company carry the day after close?
- What does the company’s annual debt service look like against its current EBITDA?
- Will the company pay any ongoing fees to you or your fund after close?
- What is your intended hold period, and what has to be true for you to sell?
- What happened to headcount, pricing, and the local office at the last three companies you bought? May I call those sellers?
Where we sit in our own framework
Fair is fair, so here’s Vicinity’s answer sheet. Our deals are funded case by case, with cash, conventional financing, and sometimes equity structures, so the honest answer to question one is “it depends on the deal, and we’ll show you exactly how yours is funded before you sign anything.” What’s constant is the operating intent: we buy companies to run them, there’s no fund clock and no planned resale, and every offer we make explains where the money comes from and what the company’s obligations look like after close. The differences between buyers are real, but they’re differences you verify with the five questions above, never ones you take on trust because a website (including this one) sounded reassuring.
An LBO offer may still be your best offer. For a large, clean MSP whose owner wants maximum price and a fast exit, it often is, and that’s one of the four paths out we think every owner should weigh with clear eyes. The point of understanding the mechanics isn’t to refuse the model. It’s to price it: for your proceeds, for your team, and for the version of the company that exists in year six. Owners who can do that math sit differently in every negotiation that follows.