r/explainlikeimfive Feb 14 '25

Economics ELI5: How do private equity firms bankrupt businesses?

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u/Borntwopk Feb 14 '25 edited Feb 14 '25

Imagine you have a lemonade stand, and you’re doing pretty well. A rich person comes along and says, I’ll buy your stand and make it even better!

But instead of using their own money, they borrow a LOT of money in your lemonade stand’s name. Now, your stand has to pay back that big debt.

Then, the rich person takes a bunch of the money your stand makes and gives it to themselves and their friends. But your stand still has to pay the debt, and soon, there’s no money left to buy lemons or cups.

Now your stand is out of business, and the rich person walks away with a big bag of money.

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u/Scoot892 Feb 14 '25

Don’t forget that they actually sell your stand to their friend so you now have to pay rent too

5

u/vanilla_w_ahintofcum Feb 14 '25

There’s no “you” anymore. “You” sold the stand so now “you” are out of the picture with cash in hand.