This is achieved in a two-step transaction: First, the private equity company performs a regular leveraged buyout and thus acquires the target company by a special buyout vehicle (NewCo). Second, the vendor reinvests a part of the purchase price in the new vehicle and is in turn granted a stake in this vehicle.
The vendor’s equity stake in the new vehicle is the main feature that distinguishes ownership buyouts from other forms of buyouts. The term ownership buyout is used as an umbrella term also embracing buyins, which would be termed ownership buying analogously.
Ownership buyouts are appropriate for buyouts in former family businesses (or owner-managed businesses). The main advantage for the selling family members is that they retain a certain stake in the company, thus facilitating the emotional valediction from the family business.
In addition, an ownership buyout provides a good opportunity for families to withdraw a certain part of their family wealth by partly selling their business. By investing the return in other assets, they can apply a diversification strategy, thereby reducing idiosyncratic risk. Further, the retained ownership stake allows the family to participate in a positive future development of the business following the buyout.
The ownership buyout is also advantageous for the private equity company, as the retained ownership stake ensures a cooperation with the family in the aftermath of the buyout. This ongoing involvement of the family can be of high importance with regard to the transformation process following the buyout and given the knowhow and business contacts of the former owners and managers.
|Ownership Buyout (OBO)|