5 ms·

Can someone explain how, if I borrow to buy a company, the company carries the debt after the sale? This seems to me what happened here, am I correct?

ubernostrum 11y ago
You have the company (which you now own) pay you money, which pays off your debt, but puts the company into debt.
- edoloughlin 11y ago
  That would seem like bad corporate governance. Why is this allowed in the case of a limited liability company? It seems like a mechanism to offload liability.
  - charlesdm 11y ago
    Only if the company goes under. Each business has a different level of acceptable debt. Some entrepreneurs are great at controlling a balance sheet, and can run businesses with a ton of debt (e.g. John Malone) For example: a real estate business needs to use a lot more debt than a software company.
caseyf7 11y ago
Because you borrow money as a new company called NewCo formed offshore and then you buy the old company with a loan tied to the assets and performance of old company. This loan is also contingent on NewCo completing the acquisition of old company. Ideally you give no personal guarantees so the bank only collects assets of old company if it fails and you walk away with your fees and dividends that you've received since then.
- psykovsky 11y ago
  Doesn't seem like a good deal for the banks. And bankers aren't the ones to let themselves be fooled like that. Something's fishy.
  - charlesdm 11y ago
    This depends. There are certain types of debt with different risk levels. The debt with the lowest levels of interest tends to be traditional bank debt. If the company goes under, they are first in line to recover any losses. The more debt involved in a deal, the riskier it gets. If you fund a $100m deal with $40m in debt, and $60m in equity, that's fine. That's usually low risk if it's a healthy company. Now imagine the same deal, $80m debt and $20m in equity. Traditional banks might only give you a loan for $50m. The remaining $30m you will need to get from other investors, who will be further in line to recover any losses (meaning they will charge a higher rate of interest). Why do banks love big deals? Easy: these deals generate a lot of profit. On a $100m loan, they'll be making $4-6m a year. Usually the risk level is acceptable for them, since they're first in line when the company gets liquidated.

ubernostrum 11y ago

You have the company (which you now own) pay you money, which pays off your debt, but puts the company into debt.

edoloughlin 11y ago
That would seem like bad corporate governance. Why is this allowed in the case of a limited liability company? It seems like a mechanism to offload liability.
- charlesdm 11y ago
  Only if the company goes under. Each business has a different level of acceptable debt. Some entrepreneurs are great at controlling a balance sheet, and can run businesses with a ton of debt (e.g. John Malone) For example: a real estate business needs to use a lot more debt than a software company.

caseyf7 11y ago

Because you borrow money as a new company called NewCo formed offshore and then you buy the old company with a loan tied to the assets and performance of old company. This loan is also contingent on NewCo completing the acquisition of old company. Ideally you give no personal guarantees so the bank only collects assets of old company if it fails and you walk away with your fees and dividends that you've received since then.

psykovsky 11y ago
Doesn't seem like a good deal for the banks. And bankers aren't the ones to let themselves be fooled like that. Something's fishy.
- charlesdm 11y ago
  This depends. There are certain types of debt with different risk levels. The debt with the lowest levels of interest tends to be traditional bank debt. If the company goes under, they are first in line to recover any losses. The more debt involved in a deal, the riskier it gets. If you fund a $100m deal with $40m in debt, and $60m in equity, that's fine. That's usually low risk if it's a healthy company. Now imagine the same deal, $80m debt and $20m in equity. Traditional banks might only give you a loan for $50m. The remaining $30m you will need to get from other investors, who will be further in line to recover any losses (meaning they will charge a higher rate of interest). Why do banks love big deals? Easy: these deals generate a lot of profit. On a $100m loan, they'll be making $4-6m a year. Usually the risk level is acceptable for them, since they're first in line when the company gets liquidated.