It can easily be argued that one of the main goals of a business is to have an advantage: former General Electric chairman and CEO Jack Welch has famously said: “If you don’t have a competitive advantage, don’t compete.” Unfortunately, not competing is rarely an option, and, sometimes, someone else has the advantage that your company needs. In order to access this advantage, you may negotiate with the competing company for usage or propose a merger of both companies; however, the often simplest and easiest way is by using today’s word – buyout.
Regardless of whether it is used as 2 separate words, compounded, or with a hyphen (all are acceptable), it is basically defined as the purchase of a controlling share in a company. The term buyout was first used in a 1976 spring issue of the publication Mergers & Acquisitions which states that: “Federal funds are another possible source of financing for employee buy-outs when conventional credit sources are unavailable.” Followed by the first usage of a leveraged buyout, the buyout of a company by its management with the help of outside capital, recorded in the Forbes July issue: “We have eased into the safer waters of secondary financings and leveraged buyouts.”
The New York City-based private equity firm Kohlberg Kravis Roberts & Co. pioneered the leveraged buyouts in the late 1970s, and in 1988 executed the most famous LBO in American history, the hostile takeover of RJR Nabisco.
Naturally, given the modern importance of our word, it is surprising to learn that it has quite a bit of age to it: it comes from a binding together of the words buy, from the Old English bycgan, meaning ‘get by paying for, acquire, or procure’, and out, from the Old English ut, meaning ‘outside or from without’, and can be traced back to the 1640s, with the general phrase buy out meaning ‘to purchase someone’s estate and, essentially, evict them’.
With the value of global private equity buyout deals alone (aka non-publicly traded companies) reaching USD 347 billion, buyouts are a fairly common occurrence in business, often involving months of planning, financial analysis, and communication with the management/ownership of the company being acquired. Still, thanks to this wide understanding of the term, it has now found usage outside of the typical business and financial circles. One of the main examples of this is in personal contracts, such as a lease agreement or employment agreement, where, for example, the landlord or employer essentially “buys out” the remainder of the contract to end it.