Buy, Strip And Flip

A buy, strip and flip occurs when a private equity firm buys out a target firm (usually with a leveraged buyout) and then sells the target firm in an initial public offering (IPO) within a relatively short period of time. Along the way, the private equity firm may take out loans to make special dividends or carry out other actions to improve its financial situation. Essentially, the private equity firm utilizes the target firm for its own gain. Decisions for how to handle the target are made are not necessarily to boost the IPO valuation of the target firm once it is put on the public market, but are more so for the benefit of the private equity firm. Sometimes, the target firm is stripped of its non-essential parts by having them sold off or closed to streamline the target's business model and cut expenses.

Private equity firms typically own and manage a target firm for a number of years. In this time, the company's management and financial situation are improved before the private equity firm cuts the newly-successful company loose with an IPO, at which time the private equity firm earns a nice return for all its work.

In the buy, strip and flip situation, purchased firms are held for only a year or two before the IPO. This usually means that the firm's financial situation is virtually unchanged and, as a result, most of these IPOs do not perform very well.