What’s the advantage of lending money that will get loaded onto a company that is already struggling and may go bankrupt?
In: Economics
Lenders will only lend money for business ventures that are relatively safe and that they can show it will be paid back. This is also the case for the company that is doing the buying too – they are putting in some of their own (and investor) money. They would have to show a detailed and believable plan of why it would work.
So why would a company be able pay that money back?
– Many owners selling just want to cash out or retire or use the money for something else. So existing sales could pay back the loan over time.
– If it’s a large company selling a part of it, they may feel that the asset doesn’t fit in with what they’re trying to do overall and that it may be expensive to run because of it. In this case, existing sales may be able to pay back the loan.
– Sometimes a private equity company may have an investment hypothesis that involves buying up a bunch of related companies and putting them together in a larger one because they may be able to leverage certain things to save money or sell more stuff. For example, maybe they are buying a struggling company and putting it together with an established one so they can take advantage of a larger, existing salesforce that has a large existing customer base that they can sell to. This not only reduces the cost for the distressed company, because they can get rid of their salesforce, but they may also be able to reach more customers with this new existing salesforce.
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