Buyout — The Dollar Dictionary

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Finance

Buyout

The acquisition of a controlling interest in a company, typically funded through a combination of equity and significant borrowed money.

Leveraged buyouts (LBOs) are the most common type of buyout. Private equity firms use a small amount of equity (typically 20-40% of the purchase price) and borrow the rest, using the acquired company's assets and cash flows as collateral. If the deal works — if the company generates enough cash to service the debt and grows in value — the PE firm returns several times their equity investment. If the debt becomes unmanageable, the company can go bankrupt.

Management buyouts (MBOs) happen when a company's existing management team buys the business from its current owners, often backed by PE funding. This aligns management incentives strongly with success — they own what they manage. Employee buyouts, where staff collectively acquire the business, are rarer but create powerful ownership cultures.

A buyout is buying the whole game, not just a piece. You're not picking up a few shares — you're acquiring enough ownership to take control, restructure the business as you see fit, and eventually sell it for a profit. The 'leverage' in leveraged buyout means you're using the target company's own future cash flows to finance most of the purchase price.

Real world: When KKR and other private equity firms took Dell private in 2013 for $24.4 billion, it was one of the largest leveraged buyouts in history. Dell used the private ownership period to restructure away from PCs and build its enterprise technology business, then relisted publicly in 2018 at a much higher valuation — a successful PE buyout playbook.

💡 A buyout transfers control and ownership in one transaction — the leverage used to finance it amplifies both the potential returns and the potential for disaster if the business underperforms.

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