An employee buyout occurs when employees purchase the company they work for. To do so, they usually take on a substantial amount of debt. Company assets are used as collateral to secure the debt, which is repaid out of future cash flow.
Employee buyouts are infrequent and typically happen in very small companies. Employees buy the company from the owner and, over time, grow their share of the company until they achieve full ownership.
Other times employees are involved in the ownership out of necessity: To create a sense of shared accountability for the company’s success or because senior managers do not have enough equity to carry out a management buyout on their own.
Because employees typically have limited experience owning or managing a business, they usually leave day-to-day management to professional managers.