What is a Buyout?

A buyout involves the acquisition of a majority of the voting shares of a business. The intent of a buyout is to gain control over the operating and financial decisions of an acquiree.

Understanding Buyouts

An acquirer may engage in a buyout for a number of reasons. For example, it may want to acquire control over a key product, or gain ownership over certain rights, such as airport gate leases. Other reasons are to prevent technology from being made available to competitors, or to gain entry into a new market. Buyouts are especially useful when an acquirer does not want to spend the time to build a business from scratch in a new market. Instead, it can gain instant entry by acquiring an organization that is already competing in that market.

The Leveraged Buyout

A leveraged buyout occurs when borrowed funds are heavily used to acquire majority control over a business. These transactions can be risky, since the acquired entity may not generate a sufficient amount of cash flow to subsequently pay off the debt. When this happens, a possible outcome is that the acquired business is forced into bankruptcy, and the acquirer loses its ownership interest in the entity.