There's a decently successful chain of restaurants that owns properties across the county for its locations, let's say the priorities alone are worth $500m collectively
Private equity firm does a "leveraged buyout", so they borrow $500m against the value of those properties and put up the rest to cover the additional value of the business themselves and buy out the chain for $800m, assigning the $500m of debt they borrowed to the acquired company.
Then they start up another company that they own separate from the acquired company and start selling off the properties to it and converting the restaurants to leasing them. Now the restaurant chain is paying $20k/mo in rent to their new company instead of just paying property taxes on the land they used to own. Pretty soon the chain locations are all losing money because the PE firm is also cutting corners everywhere and they didn't have this huge rent expense before. Locations start getting closed and people lose jobs and communities lose what was once a totally viable business. Restaurant chain is eventually bankrupt under the massive debt that was assigned to them, PE firm still owns all the land and gets to sell it off on top of all the rent they collected.
Except that this isn't a hostile takeover, the owners of the original chain have agreed to this route and likely know what it means with a fairly minimal amount of research into how these deals proceed. Might be hard to outlaw the private sale of a moderately sized company with two willing parties
I don't think the sale itself could be made illegal, but every single step of this depends on state-sanctioned fictions that we created to facilitate economic benefit and on the net this behavior is not an economic benefit. It's a scam and we've outlawed plenty of exploitative harmful scams before
Maybe certain classes of financial institutions that receive federal benefits should not be allowed to finance leveraged buyouts. Maybe there can be restrictions on selling assets that are going to continue to be used to a related entity after a financed acquisition. These aren't forces of nature we're dealing with here they're state-facilitated transactions.
Maybe the whole overall maneuver should be made illegal. Pyramid schemes are composed from otherwise legal transactions too but if it can be proven that what you did overall adds up to a pyramid scheme you're going to jail.
You're a cool person and thanks for typing all this for people to read and educate themselves that there are ways worth trying that can improve the current situation immensely.
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u/themightychris Feb 14 '25
Here's a common scenario:
There's a decently successful chain of restaurants that owns properties across the county for its locations, let's say the priorities alone are worth $500m collectively
Private equity firm does a "leveraged buyout", so they borrow $500m against the value of those properties and put up the rest to cover the additional value of the business themselves and buy out the chain for $800m, assigning the $500m of debt they borrowed to the acquired company.
Then they start up another company that they own separate from the acquired company and start selling off the properties to it and converting the restaurants to leasing them. Now the restaurant chain is paying $20k/mo in rent to their new company instead of just paying property taxes on the land they used to own. Pretty soon the chain locations are all losing money because the PE firm is also cutting corners everywhere and they didn't have this huge rent expense before. Locations start getting closed and people lose jobs and communities lose what was once a totally viable business. Restaurant chain is eventually bankrupt under the massive debt that was assigned to them, PE firm still owns all the land and gets to sell it off on top of all the rent they collected.
Yes, it should be illegal