Bankruptcy; From Corporate Downfall to Strategic Business Tool to Enrich Executives
In the landscape of 2023, bankruptcy has become a prevalent theme, with notable instances such as SVB standing out. Major corporate entities like WeWork, Vice Media, and Bed Bath & Beyond have succumbed to the weight of bankruptcy, triggered by a combination of poor management, high-interest rates, and unfavorable market conditions. What's perplexing, however, is the seeming resilience of these companies, continuing to function even in the throes of bankruptcy.
Bankryptcy aren't what they use to be in the past where it used to be a game over, it is now a business strategy, and business owners do even care if their businesses go bankrupt anymore. It is no lie that there is a new strategy that rewards taking on as much risk as possible and that is what most private equity firm do. They put money into a company that are not yet listed, appoint a new CEO, and get these CEOs to borrow about 75% of the money they invest.
After the buyout and get the money, they can either use the money to grow the company, or give the money to the private equity company who can now use the money to purchase other companies. Private equity companies call it a leverage buyout, and this is good business as the business can survive to become big or they get money from refinancing other companies. Similar to getting money from one real estate property and using it to refinance another but this time around, a business and if the company cannot pay back, the private equity firm cannot be responsible for it but if the business does well, it can bring a return of up to 5X what was invested.
Another way private firm makes money is through bankruptcy. You would have noticed that Household business names such as coca-cola, Pepsi Cola, and other big companies go not go bankrupt but since the Small Business Association has defined Small businesses as businesses with a maximum of $40 million and an employee of between 100 and 1500 employees. When you look at the value of companies that bankrupt, you will be surprised.
While bankruptcy is the end for the employees journey in the company, it isn't the end for the company rather it is the beginning of another journey as major company CEOs and Executives are paid millions of dollars after running their companies into bankruptcy. Why this is illegal, it still happens any ways. There is the Chapter 7 and Chapter 11 bankruptcy. With chapter 7 bankruptcy, the company stops operation, assets are liquidated, and stakeholders are paid back in other of priority. The CEOs of these companies are paid to ensure the bankruptcy goes well, and everyone is paid. They are paid performance base incentive.