How to asset strip a company

Stripping value from a company

Not a nice subject for the article today. Please note that the title was chosen to create interest. I do not condone deliberate asset stripping of a Company. There have been many accusations of asset stripping in the news recently so I thought it would be a useful to analyse what it is and what to look out for in cases where asset stripping may occur. Be aware that many of the below examples of methods to asset strip a Company are also perfectly reasonable tools for use in a business and do not necessarily mean that asset stripping is present. Context is everything!

What is asset stripping?

Asset stripping means exactly what you think it means. To asset strip a Company is to extract the value from a Company depleting the assets. Strictly speaking every time a Company pays a dividend it is being asset stripped. The cash asset (and accumulated  retained profits) are being extracted from the business and given to the Shareholders.

What to look for when searching for asset stripping?

Asset stripping in the more conventional sense of the word refers to excessive depletion of the assets of the Company to the financial gain of the owners. To identify asset stripping look for the following financial products/ behaviours:

PIK loans - this stands for Payment in Kind. These are the sort of loans utilised by private equity fund and involve the owners of the company lending to the Company at a high interest. The interest isn't physically paid to the shareholder until after a set amount of years, normally at the time of a resale. As the interest isn't paid then it is rolled up into the accumulated loan and as such the Company will eventually be paying interest on the interest.

Shareholder loans - a straightforward loan from the shareholder upon which the Company pays interest.

Operating leases - the shareholder provides buildings, machinery or equipment to the Company and then charges rent for its use.

Sale and lease back - the new owner sells off valuable assets such as land and buildings and then the Company rents the items back from the purchaser. The effect can be twofold. Firstly, by selling the assets the new owner can use the cash and pay themselves a large dividend, assuming that there are historic retained profits that allow them to do so. Secondly, the owner themselves may own the Company or vehicle that purchases the assets and then rents them back.

Asset sale - this is a straightforward sale of the assets followed by a payment of special dividends to the owners assuming that there are historic retained earnings sufficient to allow this to happen.

Suppliers - the new owner organised for the Company to start to procure and buy things from their own Companies instead of third parties, normally at a cost above market. 

Cuts - lay off workers, various divisions and functions for a short term cash flow gain and pay the owners big dividends. In the long run this may impact the future viability of the business.

Sale - once all of the above has been done the only thing left to do is to sell all that remains, normally just a brand name and a lot of liabilities.

Handle with care

So now you know what to look for when searching for investors that are potentially asset stripping. But be careful! Use the term "asset stripping" with extreme caution - investors will not appreciate the accusation.

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