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I would suggest that a couple places to start would be eliminating things that are purely about value transfer and extraction. 1) Not allowing a purchaser to t

by avs733 8y ago

I would suggest that a couple places to start would be eliminating things that are purely about value transfer and extraction. 1) Not allowing a purchaser to transfer debt from that purchase to the newly purchased entity. 2) Not allowing a company to pay fees for service to any corporate entity that has a conflict with a board member. The board members get paid to give advice... Yes I'm aware these are imperfect solution, yes there are loopholes, yes these things rarely work...but those two practices seem to be particularly rife for abuse.

mi100hael 8y ago
#1 is not unique to corporate acquisitions. Think of it like a real estate mortgage. You can buy an apartment complex with 25% down and finance the other 75% as long as the building produces 1.25x the debt payment in free cashflow. The key is having enough cushion in the cahsflow to account for value-add "repairs" like remodeling stores or launching a new product to maintain/grow cashflow. If an LBO is done properly, like Michael's, it's a win for everyone. Old shareholders don't lose their shirt due to an unsustainable valuation tanking, lenders get paid back, and new shareholders aren't tied to the same old valuation because they financed the acquisition and only invested a percentage of the sale price. The trick is identifying which poorly-performing companies are just overvalued and can be transformed into strong performers at a different price-point, and which companies are just headed for the gutters.