r/explainlikeimfive • u/Existing_Low_9183 • Feb 14 '25

Economics ELI5: How do private equity firms bankrupt businesses?

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u/Borntwopk Feb 14 '25

Made a better answer for the ELI5

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u/UnwoundSkeinOfYarn Feb 14 '25

No? You're example still has your nonsense idea that YOU, the original owner of the lemonade stand, has to pay back the loan that the PE firm took out to buy your stand from you. Utter bullshit and completely ignores the facts. You sold the company, you pocketed the cash, they are on the hook for the loan. They are the ones running THEIR newly purchased lemonade stand. You are relaxing at home or on the beach with the cash they paid you.

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u/stoneman9284 Feb 14 '25

I thought they meant after buying the lemonade stand they take out loans in the lemonade stand’s name for growing the business.

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u/MatCauthonsHat Feb 14 '25

Not really. They put down less than 20% of the purchase price of the lemonade stand, and takes out loans for the rest. The income of the lemonade stand is then used to pay the loans. Anything they have to cut out to pay those loans is acceptable.

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u/stoneman9284 Feb 14 '25

Totally, but they aren’t borrowing from the lemonade stand (or in its name) to buy the lemonade stand.