In finance, a buyout is an
investment
Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...
transaction by which the
ownership equity
In finance, equity is an ownership interest in property that may be subject to debts or other liabilities. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets owned. For example, if someone owns a ...
, or a
controlling interest
A controlling interest is an ownership interest in a corporation with enough voting stock shares to prevail in any stockholders' motion. A majority of voting shares (over 50%) is always a controlling interest. When a party holds less than the maj ...
of a
company
A company, abbreviated as co., is a Legal personality, legal entity representing an association of legal people, whether Natural person, natural, Juridical person, juridical or a mixture of both, with a specific objective. Company members ...
, or a majority share of the
capital stock
In economics, capital goods or capital are "those durable produced goods that are in turn used as productive inputs for further production" of goods and services. A typical example is the machinery used in a factory. At the macroeconomic level, ...
of the company is acquired. The acquirer thereby "buys out" the present equity holders of the target company. A buyout will often include the purchasing of the target company's outstanding
debt
Debt is an obligation that requires one party, the debtor, to pay money Loan, borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Co ...
, which is referred to as "assumed debt" by the purchaser. It is usually synonymous with "
acquisition".
Non-finance usage
The term may apply more generally to the purchase by one party of all of the rights of another party with respect to an ongoing transaction between the two. For example:
*An employer may "buy out" an employee's contract by making a single prepayment, so as to have no ongoing obligation to employ the person;
*A landlord may buy out the remainder of a tenant's lease, effectively paying them to vacate.
*A government may buy out homes in a
floodplain
A floodplain or flood plain or bottomlands is an area of land adjacent to a river. Floodplains stretch from the banks of a river channel to the base of the enclosing valley, and experience flooding during periods of high Discharge (hydrolog ...
or other area subject to hazard. The language used by
FEMA
The Federal Emergency Management Agency (FEMA) is an agency of the United States Department of Homeland Security (DHS), initially created under President Jimmy Carter by Presidential Reorganization Plan No. 3 of 1978 and implemented by two Exec ...
, a United States agency, is "acquisition".
*In
Major League Baseball
Major League Baseball (MLB) is a professional baseball league composed of 30 teams, divided equally between the National League (baseball), National League (NL) and the American League (AL), with 29 in the United States and 1 in Canada. MLB i ...
, a club option is an optional year at the end of the ballplayer's contract that may be guaranteed at the discretion of the team. Usually, the option comes with a "buyout" which represents a fraction of the value of the option. If at the time that the club is in a position to exercise its option and the team decides not to exercise the option, the team will usually pay the buyout and decline the option. Generally, this results in the ballplayer becoming eligible to be a
free agent
In professional sports, a free agent is a player or manager who is eligible to sign with other clubs or franchises; i.e., not under contract to any specific team. The term is also used in reference to a player who is under a contract at present ...
. Alternatively, if the contract turned one of the ballplayer's arbitration-eligible seasons into an option season, the team can decline the option with the ballplayer then entering the arbitration process instead.
*In real estate, a landlord has the opportunity to buy out their tenant on a mutually agreed upon price. Most of the time, landlords use buyouts to remove rent-stabilized tenants and move in a tenant who will pay a higher rent. This type of buyout can create benefits for both parties.
See also
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Buyout clause
A buyout clause or release clause refers to a clause in an employment contract. It allows the employee to terminate the contract unilaterally upon payment of a specified (usually substantial) fee to the employer. The fee may be paid by the employ ...
*
Employee buyout
*
Leveraged buyout
A leveraged buyout (LBO) is the acquisition of a company using a significant proportion of borrowed money (Leverage (finance), leverage) to fund the acquisition with the remainder of the purchase price funded with private equity. The assets of t ...
*
Management buyout
A management buyout (MBO) is a form of acquisition in which a company's existing managers acquire a large part, or all, of the company, whether from a parent company or individual. Management- and/or leveraged buyouts became noted phenomena of 19 ...
*
Growth buyout
A growth buyout (GBO) is an acquisition intended to allow an investor or holding company to capitalize on the market growth of a maturing portfolio company.
Characteristics
Growth buyouts often target profitable portfolio companies in indust ...
*
Mergers and acquisitions
Mergers and acquisitions (M&A) are business transactions in which the ownership of a company, business organization, or one of their operating units is transferred to or consolidated with another entity. They may happen through direct absorpt ...
*
Stub (stock) A stub is the remaining capital stock representing the equity in a corporation after a major cash or security distribution—such as a buyout, spin-off, or demerger—removes most of the company's operations. A stub may retain the name of the origi ...
*
Takeover
In business, a takeover is the purchase of one company (the ''target'') by another (the ''acquirer'' or ''bidder''). In the UK, the term refers to the acquisition of a public company whose shares are publicly listed, in contrast to the acquisi ...
Notes and references
Corporate finance
Stock market
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