The Beginner’s Guide to Buyouts: What You Should Know

It’s not uncommon for companies to change ownership. Maybe the current owners want to move on to other ventures, or perhaps they believe the company would be more successful under the guidance of new owners. Regardless, they may facilitate a buyout as part of their exit plan.

The Beginner’s Guide to Buyouts: What You Should Know

What Is a Buyout?

A buyout is an investment activity in which the current owner or owners of a company sell their stock shares. It involves the acquisition of a controlling stake or in a company an individual, a group of individuals or another entity.

Buyouts are often used to gain control of a company. The new owner or owners may then implement changes, set new objectives, or realize financial returns. It’s known as a “buyout” because the new owner or owners “buy out” the existing owner or owners. They purchase the existing owner or owner’s stock shares so that they have a majority stake in the target company.

The Different Types of Buyouts

There are several different types of buyouts. An institutional buyout involves an institutional investor purchasing a majority stake in a company. Institutional investors may consist of private equity firms, angel investors and other financial businesses. During an institutional buyout, the current owner or owners of a company will sell their stock shares to an institutional investor.

In addition to institutional buyouts, there are management buyouts. A management buyout involves members of a company’s management team purchasing a majority stake in the company where they work. The managers will typically pool together their financial resources. Using their combined capital, they will purchase stock shares from the company’s current owner or owners.

A third type of buyout is a leveraged buyout. It involves another company using a combination of both equity and debt to purchase a majority stake in another company. The company may finance the acquisition with its own equity and with a loan, for instance. This is a form of leverage, hence the term “leveraged buyout.”

In Conclusion

Buyouts are common in the world of business. They are complex transactions with a myriad of legal, financial, and operational considerations. When the current owner or owners of a business want to part ways with the company, though, they may engage in a buyout. The owner or owners can sell their stock shares. Some of the most common types of buyouts include institutional investor, management and leveraged.

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