Buyout

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What It Means

A Buyout refers to the the Acquisition of a controlling interest (more than 50%) in a company.

Why It’s Important

A Buyout represents a change of control. Once an individual or entity has control of a company, they are free to make widespread changes in the business and manage it as they see fit.

Buyouts are usually financed through a combination of debt and equity. Buyouts that occur where the majority of the financing for the Acquisition comes from debt (commonly as high as 90%) are known as Leveraged Buyouts (“LBOs”). LBOs are popular among some types of Buyers because they require the Buyer (or their investors) to put up very little capital. However, LBOs can also be very risky. Any unforeseen fluctuation in the business cycle can trip a debt covenant or put the company in a position where it can’t afford to make payments on the debt, at which point the lender can take actions up to and often including liquidating the company.

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