What Is a Buy, Strip And Flip?

Buy, strip and flip is a phrase used to describe the common practice of private equity firms buying undervalued companies, stripping them down, and then selling off the restructured entity a short time later in an initial public offering (IPO).

Key Takeaways

  • Buy, strip and flip is a phrase used to describe the controversial business practices of some private equity firms.
  • These investors buy undervalued companies, extract value from them, and then sell them off shortly after in an IPO.
  • The principal goal is to line the pockets of the private equity firm as much and as quickly as possible.
  • This objective, unsurprisingly, often tends to be detrimental to the acquired company's long-term term future.

How a Buy, Strip And Flip Works

Private equity firms are often described as looters that swiftly and mercilessly pillage companies, flip them, and then move on to the next victim.

These investment firms regularly purchase their targets using a leveraged buyout (LBO), meaning they put up a small amount of their own money and borrow the rest, pumping the companies they buy full of debt. Once on board, they may proceed to take out more loans to finance special dividends or carry out actions to trim fat from the business, bring down costs, and make it more efficient.

Sometimes, the target company is stripped of its non-essential parts, with assets being sold off or closed to streamline its business model and cut expenses. This process can be very profitable for a private equity firm and comes with the added bonus of potentially making the acquired company more attractive to prospective buyers once it is cut loose with an IPO.

Important

In buy, strip and flip scenarios, purchased firms are usually held for only a year or two before the IPO.

Essentially, the private equity firm utilizes the target company for its own gain. Decisions for how to handle the target are not necessarily made to boost its IPO valuation once it is put on the public market, but rather to line the pockets of the private equity firm.

Criticism of a Buy, Strip And Flip

The buy, strip and flip strategy, perhaps unsurprisingly, has attracted a lot of scrutiny. Leveraged buyouts have a history of leading the acquired company responsible for paying back all the debts to eventually go bankrupt. This was especially the case in the 1980s and continues to occur even today.

Retailers, in particular, have a track record of being wrecked by private equity firms. The list of causalities is long and includes the likes of Fairway, Payless ShoeSource, Toys R Us, and Sports Authority.

Critics argue that private equity firms only care about netting themselves a quick profit and are willing to do whatever it takes to make this happen. Raiding balance sheets and focusing only on investments that generate swift results enable them to make decent returns, all the while putting the long-term health of the targeted company in danger.

In essence, those who buy, strip and flip often bleed their subjects dry, emptying their cupboards, and then getting out before the impact of these measures potentially brings the company to its knees.

Special Considerations

Not all private equity firms are evil and conduct their business in this way. Sometimes, they actually make investments that benefit the companies they target over the long-termand still make a profit when the time comes to sell.

Proponents of private equity buyouts argue that they are a necessary force. Pushing management to shutter underperforming operations and deploy capital in smarter ways isn't without controversy. However, sometimes such drastic measures are necessary to ensure that the company thrives in the future.

An example of a company that flourished after a private equity buyout is Dollar General (DG). The discounter was purchased in 2007 by KKR, sold on for a tidy profit, and is now one of the country’s fastest-growing retailers.