What is a Buyout?

Mary McMahon
Mary McMahon

A buyout is a transaction in which a person, group of people, or organization buys a company or a controlling share in the stock of a company. Buyouts great and small occur all over the world on a daily basis. Particularly notable buyouts may attract the attention of the press, especially if an element of hostile takeover is involved. In a hostile takeover, a company is purchased against its will.

Man climbing a rope
Man climbing a rope

One form of buyout which is common is a management buyout or MBO. In this case, management of the company buys the company, and they may be joined by employees in the venture. This practice is sometimes questioned because management can have unfair advantages in negotiations, and could potentially manipulate the value of the company in order to bring down the purchase price for themselves. On the other hand, for employees and management, the possibility of being able to buy out their employers in the future may serve as an incentive to make the company strong.

Buyouts can also be negotiated with people or companies on the outside. For example, a large candy company might buy out smaller candy companies with the goal of cornering the market more effectively and purchasing new brands which it can use to increase its customer base. Likewise, a company which make widgets might decide to buy a company which makes thingamabobs in order to expand its operations, using an establishing company as a base rather than trying to start from scratch.

In a leveraged buyout, the company is purchased primarily with borrowed funds. In fact, as much of 90% of the purchase price can be borrowed. This can be a risky decision, as the assets of the company are usually used as collateral, and if the company fails to perform, it can go bankrupt because the people involved in in the buyout will not be able to service their debt. Leveraged buyouts wax and wane in popularity depending on economic trends.

The buyers in the buyout gain control of the company's assets, and also have the right to use trademarks, service marks, and other registered copyrights of the company. They can use the company's name and reputation, and may opt to retain several key employees who can make the transition as smooth as possible. However, people in senior management may find that they are not able to keep their jobs because the purchasing company does not want redundant personnel, and it wants to get its personnel into key positions to manage the company in accordance with their business practices.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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