Eli5: How an individual take a loan to buy a company, and have the purchased company responsible for paying back the interest?


Can the company also be made responsible to pay back the loan itself, as well as the interest?

In: 19

It does sound strange, but it makes some legal sense if you break it into two pieces.

Think about buying a house. When you buy a house, you put down a certain amount of money and the bank gives you a loan for the rest using the house as collateral. The thought being they can take the house if you ever fail to pay them back and it will be valuable enough to repay the loan. The idea in a business is the same, the expectation is that you will not drive the business into the ground so if will still have value.

The second half is once a company is private property, you can do whatever you want with it. So having the company pay back the bill is your right as the owner.

More or less, if the individual owns 100% of the company after the purchase, then there is not a lot that an owner cannot have the company do.

The caveat is that the company cannot default on their own loans or creditors that existed prior to the purchase. So a company cannot pay the owners loans or interest and then not pay the company’s loans and interests. If that happens, the other creditors will sue and the courts will likely require that the company loans be paid back first before any money is returned to the owner.

If someone wholly owns a company, they can have the company do what they want (other than breaking the law or defrauding others). That is what ownership means.

In the U.S., at least, this only works for large companies. In the case of a small company owned by one or just a few people, the owners will have to also take personal responsibility for the loan. So if the company fails and goes out of business, they will still have to pay the loan back.

I believe it’s called a “leveraged buyout.” Same thing that killed Toys R Us. On the surface it’s nonsense: you make a company take out a loan to buy itself. On a deeper level it’s also nonsense but the company’s shareholders get to walk away with a big chunk of cash from the buyout while the company burns behind them.

Once it’s yours you can do whatever you want with it but you only make money if the thing you bought is worth more than the cost of the loan. That can only happen if the people currently running the company are incompetent and/or too nice to do things like fire everyone or back out of promised pension obligations.