What is a Buyout?

by Investing School on September 22, 2010

A buyout happens when you have one corporation that seeks to “buy out” another company in order to take control of it. The entire company can be purchased or simply a controlling part of the stock. There are several different types of buyouts. There is a leveraged buyout, a venture capital buyout or a management buyout.

A leveraged buyout occurs when there is a financial sponsor involved that takes the controlling interest in the company. The financing is borrowed or “leveraged.”

A venture capital buyout will come from a core of investors that will use cash in exchange for shares in the company.
A management buyout happens when the target company’s managers seek to take over a large part of, or the entire company.

The term can also refer to an employer “buying out” an employee’s contract. This can be done by one prepayment to halt any further obligation to keep the person employed. It can also refer to a landlord that opts to “buy out” the remainder of his or her tenant’s lease. This is done in cases where the landlord wishes the tenants to vacate the property as soon as possible.

Companies can have contracts drawn that have very precise buyout provisions in place. This determines the terms of the agreement and the price. If this is not in place, then the transaction is negotiated by the different parties. When the entire company is not purchased then the remaining portion is known as a “stub.”

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