When determining the right capital structure for your company through a capital structure assessment, you want to ensure that you achieve your long-term goals, operate more efficiently, and maintain business continuity. Maybe you want to grow, so you take some acquisitions finance into account. Whatever your objectives, your capital structure needs to support it, now and longer term, in good and bad times.
Your capital structure is the particular combination of debt and equity (and everything in between) used by a company to finance its overall operations and growth. Equity capital arises from ownership shares in a company and claims to its future cashflows and profits. Debt takes the form of bond issues or loans or more short(er) term debt, while equity may come in the form of common stock, preferred stock, or retained earnings. The debt-to-equity (D/E) ratio is useful in determining the risk exposure of a company's borrowing practices, as part of overall risk management.
Capital restructuring is the modification of a firm's capital structure, either in response to changing business conditions or as a means to procure funding for the organization's intended growth. It is an approach primarily used to deal with changes that impact a business’s debt-to-equity ratio and therefore its financial stability and financial cost. However, it can also be used to rearrange capital assets and position the company to take advantage of growth opportunities, and make it more appealing to investors. When done properly, the restructuring can improve the business’s reputation in the marketplace.
Capital restructuring is usually done in response to a crisis such as changing market conditions, a hostile takeover bid, a distressed situation, or impending bankruptcy. Before the right capital structure is implemented, the company must carefully analyze its liquidity and financial structure. This means that financial modeling, as well as financial statement valuation and analysis, are essential. This often requires specialized skills and an independent opinion.
Assessing the Current Capital Structure
Before undergoing a restructuring of capital, the business should assess its current financial structure to determine whether there truly is a need for changing its capital structure. Once the rationale for making the change have been identified, it will be easier to see which changes should be made to reap the most benefits. This will require proper modelling of future scenarios. Like other business processes, capital restructuring requires great attention to detail, the ability to predict and understand market movements, and the competence to use such information effectively.
The benefits of a capital structure assessment
A successful capital restructuring can improve the business’s positioning for growth, effectively support a company through cycles, or help maintain productivity through extremely adverse circumstances. The major aim of capital restructuring is to significantly modify the current financial structure, reorganize operations, reallocate a company’s portfolio of business and participations, or restructure debt of a company. It’s away to improve the business as a whole, eliminate risk, or reduce financial harm.
Restructuring can also be of help in situations where a business has trouble paying its debts. Capital restructuring will help adjust and consolidate the terms of its debt and create a way to settle with creditors. A business does this by for instance selling off its assets, selling participations or cutting costs. A capital restructure is typically undertaken to prepare for special situations, such as a merger, buyout, sale, or change in goals or direction.
When evaluating its business model, a company may find that there are products or services that do not generate enough revenue to cover costs. After agreeing with creditors and shareholders, the company may decide to facilitate debt reduction by selling these assets, or restructuring financial arrangements and amending conditions.
As your business advisor, we will take a complete look at your business to understand all factors that can impact the choice of structure. One of the elements we look at is appetite for risk; each business have its own risk profile, driven by a range of factors such as industry, maturity, scale, management, expertise, client spread, product mix, to name a few. We will also review your business’s short- and long-term goals and aspirations. We consider revenue, cash flow, cash reserves, and debt; we develop accurate and detailed long-term forecasts, as these are essential to ensuring that your business’s capital structuring is executed correctly.
While the business’s profile is important, so is the profile of the owner(s); addressing issues such as age, marital status, estate planning, legal issues, intent to sell, or intent to pass on to the next generation. All of these factors are relevant for choosing the appropriate structure, not to forget tax planning considerations.
Our capital structuring approach includes working through all these issues together, and then building a financial model that is most appropriate for your business. Incidentally, the same process makes it easier to raise capital from various sources, which is an added bonus.
This is why getting the ”right” structure is important
With the impact of COVID-19 and the changing conditions in general, we will see, more and more, the negative impact of poor capital structuring. We have years of experience in this complex field and can help you understand the factors that impact your capital requirements. We will ensure that you have the most efficient and applicable structure for your business, for now, and for a bumpy road ahead.
Crossings as an independent advisory has gained a significant role in the restructuring of companies in cases of financial distress. As a truly independent expert advisor, we are a natural partner to represent your interests, as shareholders, as an executive board or as a supervisory board in situations where modifications to the capital structure are most needed. Especially in cases of financial distress, we can negotiate, on your behalf, with banks on new terms or on amendments on existing contracts.
Working closely with our M&A colleagues of Crossings Advisory and capital raising experts, we are well positioned to assist you in raising capital, restructuring existing debt or in supporting you with divestitures to strengthen the balance sheet.
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