Capital Restructuring

A restructuring is an action taken by a company to significantly modify the financial and operational aspects of the company. This usually happens when the business is facing financial duress or industry pressures so the purpose is limiting financial harm and improving the business. However, though restructurings are induced by negative stimuli, there are other reasons that can induce a restructuring. These include preparing for a sale, buyout, merger, change in overall direction, growth or transfer of ownership.

A Capital restructuring, thus, is a corporate operation that involves changing the mixture of debt and equity in a company’s capital structure. It is done in order to optimise profitability, undertake a growth operation or in response to a crisis like bankruptcy or changing market conditions. It is an approach primarily used to deal with changes that impact a business’s financial stability.

IMPACT THE CHOICE OF STRUCTURE A company’s risk appetite: Businesses have their own risk profile driven by a range of factors including industry, maturity, scale, management, expertise, client spread, product mix and diversity. The amount of risk a company can manage will determine the portion of debt and equity it will have since cost of capital and reduced ownership will be considered.

Short-term and long-term goals: Debt or equity is crucial in funding the company’s goals and ambitions and the time horizons for each play a huge part in that decision since both types of funding have their advantages and drawbacks tied into the timelines in which they will be used. For example, equity is not a good way of funding short-term goals since it involved relinquishing ownership and control.

Financial state: Revenue, cash flow, cash reserves and debt are important in determining whether to use debt of equity since they are what will be used to service the obligations.

The owners profile: addressing such issues as age, marital status, estate and succession planning, legal issues, intent to sell or intent to pass on to the next generation are important. This is because they have a direct bearing on the future of the company both in the short-term and the long-term. Funding is different for an ordinary business versus a family business. A married operator is not the same as a single operator in terms of the risks they are willing to take. An older business person is likely to be thinking of succession planning and a new founder may have a different vision for the business. It would therefore be unwise for that person to give up equity or take very long-term debts.

Tax planning: Whatever funding you are using has tax implications that must be considered. Additionally, our tax regulations prescribe capitalisation rules that companies must follow. In choosing debt or equity, be wary of the taxes that follows either decision.