Buyout: Definition, Types, How They Work, Risks, and Examples

Key takeaways

• A buyout is the acquisition of a controlling interest in a company—typically more than 50%—resulting in a change of control.
• Management buyouts (MBOs) occur when company managers purchase the business or a division; leveraged buyouts (LBOs) use substantial borrowed money.
• Private-equity firms often pursue buyouts to take undervalued or underperforming companies private, restructure them, and later exit via sale or IPO.
• LBOs are high-risk, high-reward: target assets frequently serve as loan collateral and may be sold to repay debt.

What is a buyout?

A buyout occurs when an investor or group acquires a controlling stake in a company. The buyer gains decision-making control and may change strategy, management, capital structure, or ownership status (for example, taking a public company private). Buyouts are a common tool in mergers and acquisitions and can be executed by private-equity firms, the company’s own management, other corporations, or partnerships of investors.

How buyouts typically work

• Buyers identify a target—often underperforming, undervalued, or non-core divisions.
• Financing can be a mix of equity from buyers and significant debt from lenders.
• The target’s assets and future cash flows are commonly used as collateral for debt financing.
• After acquisition, owners focus on improving operations, reducing costs, restructuring, or divesting assets to increase value.
• The exit can be an IPO, sale to a strategic buyer, or secondary buyout.

Buyout firms are usually funded by institutional investors and wealthy individuals and may work alone or in partnership on deals.

Common types of buyouts

• Management Buyout (MBO): Company managers purchase the business or a division, often to provide an exit for owners, allow retirement transfers, or preserve continuity. Financing usually combines manager equity, outside investor equity, and debt.
• Leveraged Buyout (LBO): The buyer uses a large proportion of borrowed funds to finance the acquisition. The buyer’s equity contribution can be small (sometimes around 10%), with the remainder financed through loans secured by the target’s assets. LBOs rely on strong future cash flows and operational improvements to service debt and generate returns.
• Partner buyouts / buy-sell (shotgun) clauses: In partnerships or closely held firms, buy-sell provisions can force one partner to buy or sell shares under predefined terms, facilitating orderly exits or resolving disputes.

Benefits and risks

Benefits:
* Can unlock value by improving operations, refocusing strategy, or restructuring capital.
* Offers liquidity to sellers and potential upside for buyers if turnaround succeeds.

Risks:
* High leverage increases financial risk; insufficient cash flow can lead to default or bankruptcy.
Asset sales to service debt can weaken the core business.
Management changes or cost-cutting can damage long-term prospects if misapplied.

Notable examples

• Safeway (1986): Kohlberg Kravis Roberts (KKR) completed a friendly leveraged buyout of Safeway for $5.5 billion. KKR restructured the business, divested assets, and closed unprofitable stores. Safeway returned to the public markets in 1990. One investor turned an initial $129 million into nearly $7.2 billion.
• Hilton Hotels (2007): Blackstone Group acquired Hilton for about $26 billion via an LBO, contributing roughly $5.5 billion in equity and financing about $20.5 billion in debt. Hilton struggled through the 2008–2009 downturn but later refinanced and improved operations; Blackstone eventually sold Hilton for a profit near $10 billion.

Conclusion

Buyouts are a powerful tool for transferring control, restructuring companies, and potentially generating large returns. The mechanics vary—from manager-led MBOs to debt-heavy LBOs—but all hinge on improving value after acquisition. Investors and owners should weigh the potential upside against the elevated financial and operational risks, especially when leverage is significant.