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Capital Ideas for Private Business

When should you Recapitalize your company?

By George A. Walden II, Principal
Houston Office
Corporate Finance Associates

You have survived the downturn and suddenly orders are coming in. But guess what, you have depleted your working capital and you're watching your cash go out the door ordering materials and adding personnel. This is often the period when companies fail because growth burns through their resources. To compound the issue, your bank is not very comfortable with giving you money because your earnings history hasn't been the best over the last business cycle. You're feeling good about just surviving and don't understand why suddenly you're not as bankable as you once were.

If you look at your balance sheet and you're a mess, you have too much debt and no recent history of strong cash flow, then you should consider a Recapitalization.

Per Investopedia: "Recapitalization is restructuring a company's debt and equity mixture, often with the aim of making a company capital structure more stable or optimal"

Unlike a partial sale where the buying group is buying the stock or assets of a company and the proceeds of the sale goes to the owner. A Recapitalization usually puts money directly into the company.

Here are three common reasons for a recapitalization:

  1. Working Capital: There has been a pickup in business in Texas, especially in the energy sector. Companies are getting orders and they are low on cash, a common theme I am observing in the current business cycle. Some industries such as the energy sector is still considered toxic and traditional bank debt just isn't available. Giving up a part of your equity for a cash infusion could be a solution to your problem. For many companies, it will be the best solution. Bringing in an equity partner often results in system improvements, strategic planning and a better understanding of your corporate goals and vision.

  2. Expansion into other products or markets: Whether opening new markets or new product lines, expansion can be very capital intensive. Said another way it can be very risky. Which comes first, the new plant so the company can support its new orders, the equipment to manufacture it, the labor force to man the equipment or do you set up a sales force and get orders before the new plant. We have all heard if you build it they will come. But what happens if the orders don't come and you have built it. What happens if the new product isn't as well received or your manufacturing processes don't hold up? Why are you taking on all the risk when it can be mitigated? Why not share the load?

  3. A chance to acquire and gain market share in an industry: It is hard enough to run your business. Unless you have put the systems in place to do this imagine the difficulty of acquiring another company. There is a community of buyers (set up to do this) willing to deploy capital and time to not only invest in your company but they will help you define, target and chase those companies that would facilitate your combined future.

One caveat to this discussion is the risk of running out of runway. Too many business owners wait until it is too late to look at Recapitalization as a tool to fund growth or fix a balance sheet. Waiting till you can't fund your payroll is not the time look at a Recap. Start the Recapitalization process early if you are having cash flow issues.

In closing a Recapitalization is designed to make your company's capital structure more stable or optimal. Yes, this can mean taking on a partner. It can also allow you to sleep at night knowing you are not in the fray alone and tomorrows payroll will be met.

To access the video version of this article, please click here.

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