Recapitalization is a way to restructure the debt and equity of your company to provide more financial stability. The goal is to change the capital structure of a company while rebalancing debt and equity obligations. It impacts the stock ownership or debt structure of the business, but in the end, the intent is to leave your company with a better financial and more manageable future.
Recapitalization helps your company increase value so you can sell it for a higher profit because debt is restructured. It also allows business owners to reduce the amount of wealth at stake by selling a portion of your company to an outside investment firm or private equity group.
Reworking the capital structure of a company is a process involving the swap of one form of financing for another—exchanging debt for equity or equity for debt. An example would be eliminating preferred shares and replacing them with bonds. Another option would be to issue debt to buy back the company’s equity shares. This can be applicable to both publicly and privately traded stocks.
Some reasons to recapitalize include offering liquidity for shareholders, paying down debt, and expanding capital. Companies can issue debt in the form of long-term loans, exercise an overdraft facility, or issue corporate bonds.
To execute this process successfully, business owners should clearly define their objectives and expectations, then gather data about the market. Finding the right financial partner is key. Changing the capital structure of your business is a major undertaking, so it’s important to focus on the day-to-day operations of the business itself while knee-deep in the recapitalization process. Your financial partner should be able to advise you as to finding the best rates, leveraging tax advantages, and even help you plan what your restructuring will look like.
When a company recapitalizes, in many ways they are stating afresh and with strong financial leadership, the company is positioning itself for whatever challenges may lie ahead.
To learn more about recapitalization and other funding topics, tune in to The Funding University’s podcast hosted by Seth Block at www.thefundinguniversity.com/podcast.
