Chapter 7: Bankruptcy liquidation발음듣기
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Chapter 7: Bankruptcy liquidation
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In the last set of videos, we've hopefully familiarized ourselves with the different ways that a company can raise capital.발음듣기
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You start with the angel investors, or maybe your rich uncle, and then eventually get venture capitalists, and you do an initial public offering.발음듣기
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That's one way that you can get cash or get capital so that you can buy assets to run your business.발음듣기
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So you might have been part of the equity holder, and you have to sell some of the equity, or sell some shares in your company for someone else to give money.발음듣기
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Debt isn't the only kind of liability, but that's a pretty reasonable simplification for now.발음듣기
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You might have some type of legal liability, where someone is suing you or you had sprayed asbestos on a bunch of playgrounds, thinking that it was actually good for the playground equipment and now there's all of this liability because, well, you get the idea.발음듣기
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Whenever you hear things like book value, and I've done a couple of videos on book value versus market value, but the book value is essentially what you have on your accounting books.발음듣기
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And let's say, for whatever reason, the economy turns south or maybe this was some type of business that's now not viable.발음듣기
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They know it's bad and it means to some degree that a company can't operate as it was before.발음듣기
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You're never going to make any money, so you might as well just sell everything you have. You liquidate it all.발음듣기
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But just to understand kind of a simplified scenario, let's take liquidation into consideration.발음듣기
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So let's say that this was my website selling shoes online, and that all of a sudden people have stopped wearing shoes.발음듣기
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So I'm just going to liquidate my assets, my real estate that I might have, my warehouses, et cetera, et cetera.발음듣기
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So let's say when we liquidate it - so we go into bankruptcy and essentially all of the assets are taken into possession by the bankruptcy court - they're going to sell these assets.발음듣기
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I paid for them thinking that they were useful in some way, but they end up not to be, so my assets - You know what, I just realized when I talked earlier about there's two ways to raise capital, there's a third way to raise capital. Right?발음듣기
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Once you start a company, hopefully you generate earnings, and that'll also generate cash or capital that you can reinvest in the business.발음듣기
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But I just wanted to make it clear that that's obviously the best way to generate capital for your business is when the business itself generates capital.발음듣기
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So let's say that these assets, when you actually sell them off, aren't worth $10 million anymore.발음듣기
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And I think you'll get a sense based on where I took the $5 million out of, who gets the money.발음듣기
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And the way I drew it right here, you can kind of view it as you go up in this direction, you're getting more senior.발음듣기
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And seniority, when you talk about a company's capital structure, is just, you know what, if there's anything left, who gets their money first?발음듣기
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And secured means there's actually some collateral on the asset side that they get if the company can't pay.발음듣기
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So just in kind of our everyday personal finance world, your mortgage is actually secured debt.발음듣기
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It means that there's some collateral, and in the event of a bankruptcy this guy can immediately go and get the collateral that his debt is secured by.발음듣기
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Some people are the first people to get the money, and then whatever money is left goes to this person, then if there's any money left, it goes to this person, and then if there's anything left it goes to this person.발음듣기
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And once you're in bankruptcy court it does tend to be a negotiation between the different, you can almost view it as buckets, of debt.발음듣기
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That the senior guys get made whole first, then the more junior guys get whatever's left, and so on and so forth.발음듣기
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That's actually the - I guess you could call it - the beauty of a corporate structure, that you have limited liability.발음듣기
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And let's say that this is $2 million of subordinated - subordinated just means they're not senior - unsecured.발음듣기
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So in this reality, what would happen is the bankruptcy court would liquidate all this stuff and then they'll hand it out in order of seniority.발음듣기
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And they probably charged a lower interest rate, because they didn't perceive their risk that high to begin with.발음듣기
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So they took a little bit of a hit, but that's OK because when things were good, they probably got higher interest to compensate them for their risk.발음듣기
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Usually as you get more and more junior and you take on more risk, you get more upside, or more interest.발음듣기
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And if there was actually $7 million here instead of $5 million, then you would have paid the six off completely, and then the equity holders would've gotten $1 million.발음듣기
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Anyway, in the next video I'll cover - this was liquidation, where we just say this isn't worth running.발음듣기
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