What Is an Institutional Buyout (IBO)?

Estimated read time 3 min read

When researching different types of corporate acquisitions, you may come across institutional buyouts (IBOs). IBOs have become increasingly common in recent years. They allow investors to purchase an ownership stake in a given business. If the business grows and becomes successful, investors can then sell some or all of their stake for a profit. An IBO, however, is a unique type of corporate institution that offers both advantages and disadvantages for businesses.

What Is an Institutional Buyout (IBO)?

Overview of the IBO Process

An IBO is the majority acquisition of a given business by an institutional investor. Institutional investors can consist of banks, venture capital firms, private equity firms and other financial institutions.

During an IBO, an institutional investor will purchase at least 51% of the target business. As a result, the institutional investor will hold a majority stake in it. It’s known as an “institutional buyout” because it involves an institutional investor “buying out” a given business.

Advantages of IBO

For businesses, an IBO offers advantages. You can use it to secure financing for your business without incurring debt. Institutional investors don’t lend money during an IBO. Rather, they purchase a majority stake in the target business. By selling a 51% or higher ownership stake of your business to an institutional investor, you can get money to grow your business without incurring debt.

Institutional investors will often pay a premium during an IBO. With an IBO, they will have the controlling interest in the target business. This means institutional investors can make vital decisions regarding the business’s operations. Because it gives them the controlling interest, institutional investors are typically willing to pay a premium during an IBO.

Disadvantages of IBO

There are disadvantages of selling a majority stake of your business to an institutional investor as well. Not surprisingly, the main disadvantage is that it requires forfeiture of controlling interest in your business. You will no longer hold the majority, controlling interest in your business if you proceed with an IBO. Rather, the institutional investor will hold the controlling interest.

IBOs can be somewhat complex as well. They can take anywhere from three to six months, and during this time, both parties will have to file various documents. The good news is that there are service providers available that can assist with an IBO. Nonetheless, the complexity of an IBO is still a potential disadvantage.

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