eli5: how does a company ‘buy themselves back’


Say a large company bought out a smaller one. Then in a years time the smaller one bought them selves again, how does that work. Do the board gather round and chip in, do they have a constant IOU to the parent company until it’s all been paid, can the original owner pay it back off again?

In: 3

This depends entirely on how the purchase was set up.

Sometimes, a large company will buy a **majority share** of another company but allow it to continue operating “independently.” What that means is that this large company owns more than half of the stock of the company. If the small company manages to raise some money or obtain a loan, they could offer to buy that stock from the large company and buy the majority ownership back.

When you buy a company. You are buying the name of the company. If you have the infrastructure in place and don’t need any assistance from the owner, then it’s a pretty clean break. Take a look at Gretsch Guitars. They were owned by the Gretsch family, then purchased by Baldwin, then purchased again by the Gretsch family, and now Fender controls their distribution.

Buying a company out generally just means buying up enough stock to have a controlling vote. In this way the larger company’s stakeholders can control the actions of the company without it necessarily being part of the same organization the way a wholly owned subsidiary would be. Given the legal freedom to do so, which doesn’t exist in every country, they may then vote to sell the assets, intellectual property and so on to the larger company at a sweetheart rate and dissolve the smaller company in order to consolidate, or they may just carry on using it as a de facto subsidiary that works to the larger company’s benefits. This gets into the stereotypical “hostile takeover” of 80’s business movie fame.

That doesn’t necessarily mean that previous major stakeholders, like maybe the board or founders of the smaller company, don’t still have a significant number of shares. If the smaller company continues to operate “buying it back” would just be a matter of acquiring enough shares to regain a controlling percentage as an individual or as a group of individuals. This happens occasionally as investment. An investment firm can buy up controlling interest in a company, install their preferred CEO and inject some capital to increase the company’s profitability and value, then divest themselves of the stock at (they hope) a large profit and use that to move on to the next company. It’s something like flipping houses. Who buys up that stock doesn’t much matter to them if they make a good profit or (at times) can cut their losses to move on to better opportunities. It could go to the market as an IPO if it was privately held before, it could be sold back to another investor or, in VERY rare cases, previous owners might buy it back.

Let’s say LargeCo bought SmallCo for $100m a few years ago, and it’s not working out. The founder of SmallCo reaches a deal to buy back the company for $20m. He might simply have the $20m from the original sale, or he might have lined up additional investors to partner with him.

It’s basically all about stock in the company. All companies have stock even ones you can’t buy on the stock market. That stock is essentially a percentage of the company. So a smaller company can buy their stock back from the larger company or a company can buy back stock from the public if it’s publicly traded.