Buyback is a commonly used instrument in both public and private markets for a variety of reasons. In simple terms, it refers to the repurchasing of own shares by a company. It is the opposite of raising funds, which results in the dilution of equity. Let’s now take a look at why companies chose to go in for a buyback and the impact it has on the company.
Purpose of buyback: A buyback is conducted essentially to either: consolidate stake in a company; provide an exit route to shareholders/founders/employees; increase shareholder wealth, or leverage available cash when there aren’t other attractive avenues to deploy it.
Outcome of buyback: Number of outstanding shares decreases; ownership of continuing shareholders increases; an increase in the Earnings Per Share results in an increase in shareholders’ wealth; and a reduction in cash balance.
The impact of the buyback of shares on the shareholding pattern can be significant. In the context of buyback by a private company, every shareholder is keen to know the effect of buyback on his ownership.
With Topper, founders and investors can track the entire cap table journey, including buybacks, through user-friendly dashboards.
Buyback on your dashboard
1. In the above example, two entrepreneurs — let’s call them Anil Sharma and Rahul Naik — founded a company by shelling out Rs 5 lakh each in April 2015.
2. They went on to raise Rs 2.43 crores in their angel round by raising additional equity. This diluted their share by 9.5% each.
3. Later, in 2019, Anil Sharma decided to exit the company. The company repurchased its shares, which led to an increase in the ownership percentage of each shareholder.
Buybacks are an important aspect of a company’s cap table and essential for analyzing future investment decisions in the company. Having the entire transaction on a dashboard helps founders and investors review the details of a buyback and ensure compliance.