I understand the idea of a loan: borrow money, pay it back over time plus a fee for the favor of having more money sooner.
I understand having a company and taking out a loan: borrow money to do something to help the company make more money and pay it off... but it's OK you made enough that it was a good idea.
But HOW can someone borrow money to BUY a company then say the cost of the loan should go on the companies books?
@futurebird It wouldn't matter if the purchased company manages to pay back the loan, it would just be accounting.
But the vulture capitalists have an even better trick: borrow money to buy a company, and assign the debt to that company. Then loot the company, sell it off for parts, give big payouts to the execs of the firm that bought it, split it into pieces, then declare a major piece of the company bankrupt so the debt never has to be paid. This trick has been used to get rid of pension obligations, for example.
@futurebird (depending on relevant state laws etc):
A forms business entity B, which takes out a business loan to buy company C. After the purchase, company C ceases to be separate and gets folded into business entity B after the purchase so the books for biz entity B and company C are the same, which will reflect the loan amount still outstanding for biz entity B from the purchase of company C. If A decided that the now-combined entity will use company C's name, the loan will, too.
@futurebird It’s pretty simple really, you see corporations are people, so just as when we absorb another person, we are free to say which part of our agglomeration should get in trouble if we can’t repay the loan.
Say you took out a loan to buy a snazzy white blazer. When you buy yourself an extra torso, you could say it’s that torso’s blazer, so it should pay up, right? Works the same way for corporations.
@futurebird Well... it doesn't really make sense, no. But it's not really a straightforward trade. There's always another party involved, the one who owned the company before the buy. And they want money.
So they can agree to let the company bear the cost, then sell, and run off into the sunset with their piles of cash.
Meanwhile, the buyer can take the loan without the cost; the company already agreed to it prior to the change of ownership!
It is very complicated and depends upon the type of loan, and ownership structure of the company you are buying. It also depends on who/what is getting the money from the sale. This requires a proper answer from a tax and accounting expert.
What I don't understand is how it can be anything but a terrible idea... if what one cares about is the company doing well. Which seems like it ought to matter, right? A little?
@futurebird That’s your mistake. They absolutely do not care if the company does well. They sell off its assets and pay themselves bonuses and then it goes bankrupt because they saddled it with debt. Next company… lather rinse repeat. Someone else built the company not them, they don’t are about it, the employees or the town it supported. . @MagentaRocks
Companies aren't the best of the fabric of communities, but they are a part of the institutional fabric that makes society work.
They have institutional knowledge, they are centers of social and economic activity. Just destroying them to grind them up for parts is very short sighted and ... making things worse for profit.
It's bad enough this happens to real institutions in other ways.
@futurebird I guess because the company counts as something you've earned from the loan, so it makes sense to be able to use the company to pay back the loan. Am I making sense here? I don't know.
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