Legal Definitions - buying on margin

A buyout occurs when an individual, a group of investors, or another company acquires all or a significant controlling percentage of the assets or ownership shares of an existing business. The primary goal of a buyout is to gain full control or a dominant stake in the target company.

There are several common types of buyouts:

• Leveraged Buyout (LBO): An LBO is a specific type of buyout where the acquisition of a company is financed primarily through borrowed money. The assets of the company being acquired often serve as collateral for these loans. The acquiring party typically contributes a relatively small amount of its own equity.
• Management Buyout (MBO): An MBO happens when a company's existing management team purchases a controlling stake in the company they currently manage. This can sometimes be structured as a leveraged buyout.

Here are some examples to illustrate the concept of a buyout:

• Example 1 (General Buyout): A large national fitness chain, "Peak Performance Gyms," identifies a smaller, independent gym, "Community Fitness Center," that has a loyal local membership and prime real estate in an underserved market. Peak Performance Gyms offers to purchase all the assets of Community Fitness Center, including its equipment, member contracts, and the building itself. The owner of Community Fitness Center agrees to the sale, and Peak Performance Gyms takes over the entire operation, rebranding it under its own name. This is a straightforward buyout where one company acquires another to expand its market reach.

• Example 2 (Leveraged Buyout - LBO): A private equity firm, "Synergy Capital," believes that "Global Logistics Solutions," a publicly traded shipping company, is not operating at its full potential. Synergy Capital decides to acquire Global Logistics Solutions. To finance this acquisition, Synergy Capital borrows a substantial amount of money from banks and other lenders, using Global Logistics Solutions' existing assets (like its fleet of trucks, warehouses, and long-term contracts) as collateral for these loans. Synergy Capital contributes a smaller portion of its own funds. Once the deal is complete, Global Logistics Solutions becomes a privately held company owned by Synergy Capital, which then works to improve its efficiency and profitability before eventually selling it.

• Example 3 (Management Buyout - MBO): The founder of "Artisan Coffee Roasters," a successful regional coffee producer, decides to retire and wants to sell the business. Rather than selling to an external competitor, the company's long-serving CEO and senior management team, who have deep knowledge of the business and its operations, decide to pool their resources. They secure a loan from a commercial bank and use their combined funds to purchase the founder's entire ownership stake. The management team then becomes the new owners of Artisan Coffee Roasters, continuing to run the company with their established vision and strategy.