Buyout is a term used for a transaction in which a company’s ownership, or at least most of its shares are acquired by another entity.
There are different kinds of buyouts. In cases where public companies are acquired by private entities, the company is said to be going private, or privatized.
There are different types of buyouts. A leveraged buyout, also be referred to as a highly-leveraged transaction, involves an investor’s acquisition of a controlling interest of a company by borrowing a certain amount to finance a substantial portion of the purchase price. The assets acquired serve as collateral for the loan.
On the other hand, in a management buyout, management takes over the business. This sometimes happens when a company is about to be closed down, or if management thinks that it can run the business more effectively.
Companies that wish to liquidate their assets quickly may welcome this move. Since management is already familiar with how the business is run, it is also easier for them than for outside buyers to make decisions.
In other situations, the term buyout can also be used to describe a situation in which an employer issues payment of a substantial amount to an employee in order to buy out the contract. By doing so, the employer cuts his obligation to continue employing the person.
Other types of contracts may also include buyout provisions which state the conditions for a buyout and the price to be paid. Negotiations can be made in the absence of such provisions.