Leveraged Buy Outs Explained Simply 

Thank you! Means a lot 🙏

@@dwfeath Nothing wrong with shorting stocks, it helps in price discovery which is important in any market. You want to only sell and grow and have things burst in a bubble later? If something is weak and had issues, you want it to get discovered sooner so less people will get hurt. Shorting a stock adds a profit motive to people who can identify flaws in companies, which helps get the market to true price discovery sooner. Besides shorting is not some easy get rich quick scheme. It's extremely risky with literally unlimited risk and liability (unlike LBO where there is almost zero risk on the owner doing the LBO and all on the company taking the debt). Contrast with normal purchases where your risk is capped at just what you bought. They are of course short sellers who use underhanded and illegal tactics but that is different from the concept of short selling itself, just like they are underhanded/illegal tactics in normal stock trading as well.

What did you go for in college? Im interested in learning more about the type of thing but dont really know where to go and what I should choose to do so.

@@uboyjarvis MBA

here you dont learn nothing ... this business would be bankrupt in less then a year time .

@@andrecamacho7660 Calm down, just a simple analysis on the topic. Obviously deals are much more complex than this...

@@nikn1250 i can understand when people give exemples in a shalow way on their videos ... the videos may get to complex . here is not about complexity .. its about wrong info ... amortization of debt (when you consider interest) is basic and should be considered in the shalowest video ... if amortization was considered, the operation had no viability at all

😂😂😂😂

And if you are a Man United fan, RIP Man United, too.

😊

like exactly

Well, the PE firm put their $10m deposit and a sign a legal contract with the company under the condition that if the PE firm does not successfully secure a loan from a bank, the PE firm has the right to get the deposit back. Then the PE firm go to the bank with that legal document to prove that the xyz company agree to sell their company if the bank grant the PE firm a loan. Then the bank start valuing the asset to see if it worth 10m or not, if it is the loan will be granted.

Most of the time these PE's have great relationships with banks that will give them the money.

Usually you’re paying a little bit of the principal as well but that number goes down very slowly. Essentially you don’t start paying down the principal until most of the interest is already paid. It’s how it works with loans, it’s very annoying. If you run a loan calculator online you’ll notice it

I was curious about this too. Is it not the case that interest payments recur up until the principal is completely repaid?

Thanks Diogo!

I think he did forget it. I'm guessing they still come out ahead than using cash to purchase.

Earnings and cash flow are connected, but aren’t the same. Cash flow isn’t being shown here, but I guess an amortization table could clear the myth. Interest, at the highest level of debt, is 9M the first year, but will gradually be smaller.

Thank you kindly Eric. :)

And the answer is: you actually bought the company with 100kk which 90kk in debt, producing 9kk of interests. Since the company is now yours, 15kk revenue can be used for paying interests, after that you subtract taxes and you get the 4kk of net profit that is 40% of the 10kk you put down

@@heysupremee3883 did joe shmoe get his 100k

Agreed. Toys r us died this way

No

It’s really not any different from buying a house with a mortgage, which is also secured by … the house.

@@mikefranco76but generally banks won’t let you leverage a house you don’t yet own to get money to buy that house. In fact doing so even in 1-2% off loans is what is said to have caused the large majority of the damage leading to the Great Recession

​​​@@mikefranco76Company is a separate legal entity and there are laws preventing the owner from just transfering money from the company to his account. You can only pay money in form of dividends. The payout is that you don't answer with your own property if the company goes bankrupt. Unlike if you are private businessman, then you answer with your property. I don't get how this loophole with leverage buyout is still allowed.

I have 0 ideas about it practically but from what I've gathered from the video, if a company gets a higher return on their capital from an LBO vs acquiring a company all out in cash, they would go ahead with an LBO.