Buyout Definition & Types

Jun 18, 2011

Written by:
Al Hill

Buyouts Definition

A buyout is a purchase of a company where a controlling interest is transferred to another entity.  Many people believe that a buyout means the entire company is purchased; however a buyout can occur when 51% or more of the company’s stock is bought.

Types of Buyouts

Management Buyout

A management buyout occurs when the existing management team in the company pool their resources together to take a controlling interest in the company.

Leveraged Buyout

A leveraged buyout occurs when an entity is able to take controlling interest of a company stock by financing a large portion of these funds.  The assets of the purchased company are used as assets for collateral against the loan to purchase the company.

Friendly Takeover

A friendly takeover occurs when the bidder makes a formal offer to the board of directors for the company.  This offer will contain explicit details of the purchase agreement, which is then presented to shareholders for approval.

Hostile Takeover

A hostile takeover occurs when the bidder attempts to bypass the board completely in order to purchase the company.  This can be triggered by the board rejecting the initial offer from the bidder or the bidder just goes directly to the shareholders as they believe the purchase will benefit the investors more than the management team.

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