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The Rise in "Buy to Sell" Related Bankruptcies

The Rise in "Buy to Sell" Related Bankruptcies

The recent surge in bankruptcies linked to "buy to sell" ownership strategies have cast a spotlight on a controversial financing technique favored by private equity firms. This strategy, colloquially known as asset-stripping, has contributed to the downfall of various retail chains and healthcare operations.

“Buy to Sell” Asset Stripping

Asset-stripping involves an owner or investor selling off a company's assets to extract value for themselves, often leaving the company in a weakened financial state. A prevalent form of this technique is the sale/leaseback arrangement, where a company's real estate is sold and then leased back. This approach has been implicated in several high-profile bankruptcies, including those of Sears, Mervyn’s, ShopKo, and healthcare operations such as Steward Healthcare and Manor Care, all previously owned by private equity.

A notable example of asset-stripping's detrimental effects is Red Lobster. When a private equity firm acquired the seafood chain in 2014, it sold the real estate under the restaurants for $1.5 billion. The subsequent high rent costs crippled the restaurants' ability to operate profitably, illustrating the destructive potential of this financing strategy.

Private Equity’s Impact on U.S. Healthcare

The healthcare sector has not been immune to the ravages of asset-stripping. Recently, bankrupt Steward Health Care put all 31 of its hospitals up for sale to counter over $9 Billion in liabilities. While the organization plans to keep these hospitals open until there is a change of ownership, a successful sale is required to make sure that communities across the country are not impacted with a loss of service.  

High Risk Nature of Private Equity Ownership

The rise in "buy to sell" related bankruptcies highlights the need for greater oversight and regulation of private equity practices. The asset-stripping technique, while profitable for investors, often leaves companies in a precarious financial state, leading to job losses, reduced services, and, in the case of healthcare, potential threats to patient care.  

Companies purchased by private equity firms are ten times more likely to go bankrupt than those not owned by such firms, according to academic research. This alarming statistic underscores the high-risk nature of private equity ownership, particularly in critical sectors like healthcare.  

Long term “Buy to Keep” Outlook

In contrast to the short-term, profit-driven "buy to sell" approach, many public companies adopt a "buy to keep" strategy, emphasizing long-term stability and growth. These companies focus on sustainable business practices, reinvesting profits back into the business to improve operations, innovate, and expand market reach. By maintaining ownership of key assets and avoiding excessive debt, they aim to build resilient, enduring enterprises. This approach not only benefits the companies themselves but also supports employees, customers, and the broader community, fostering economic stability and growth over the long term.

A Seller’s Perspective  

Meet Randy McIntyre, the original owner of DIS - Dealer Information Systems, who had been with the company for an impressive 30 years. Randy shares insights into DIS's journey and the Perseus acquisition, highlighting the importance of a long-term vision and commitment to the market. For companies looking to sell, Randy's advice is clear:

"You have to decide what you want in the future... That meant partnering with someone who really did understand their business and was committed to the market just like we were. And that's why we chose Perseus."

"The reason that DIS chose Perseus was the due diligence that we had done. Looking through several companies that had talked with us, most of which were private equity. But Perseus had an entirely different approach.Their approach was long term ownership, understand the market, and be committedto the staff and the company for a very long term relationship."

Recently, Auto-IT found its permanent home with Perseus for similar reasons. CEO, Wayne Rushworth, sought a stable environment for his business, where long-term decisions would shape the future of the company, its employees, and its customers.  

"What you said in your offer and the perimeter's of that offer didn't really deviate. And that was important for us. I think the pitch that you guys have put up in terms of, you're not like a typical private equity group that comes in. It's a short horizon. Put up the prices, cut the costs and exit in three to five years. That's not your style or mantra, right? It's about a long term hold. And I think it was important for us to make sure for our customers and also for our staff that they saw a future that was going to go beyond a future that they may have with a private equity crowd. That they're looking for a long term career stability.”  

For more information or to discuss how our M&A experts can help you navigate these challenges, please reach out to our team.

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