What is a common risk associated with leveraged buyouts?

The burden of high debt leading to financial distress is a significant risk associated with leveraged buyouts. In a leveraged buyout, a substantial portion of the purchase price is financed through debt. As a result, the acquired company often has to allocate a substantial share of its cash flow to service this debt, which can severely restrict its financial flexibility. If the company experiences a downturn in performance or faces unexpected expenses, the high levels of debt can lead to financial distress, potentially resulting in bankruptcy or the need for asset sales to meet obligations. This risk underscores the importance of careful financial planning and risk assessment in leveraged buyouts.

The other options may highlight some aspects of leveraged buyouts, such as the potential for returns or increased cash flow due to borrowed funds, but they do not encapsulate the central risk factor present in such transactions. Enhanced company reputation and market presence, while potentially beneficial outcomes, do not directly address the inherent financial risks associated with taking on significant leverage.