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Those who recapitalize a business often want to change their company’s capital structure by bringing in fresh money. This often occurs through issuing new shares, converting debentures into shares and engaging in long–term borrowing. Recapitalization is common when a company experiences bankruptcy and when new capital is needed to support expansion activities.
Recapitalization
Entrepreneurs who successfully built a company will often face serious financial decisions and dilemmas. They may need to obtain capital to fund internal growth and external acquisitions. They may need capital to generate liquidity to diversify net worth. A business recapitalization is a formal restructuring of the company’s balance sheet. It is accomplished through using assets, equity, cash flows and existing operations to raise additional capital. Recapitalization is used to consolidate the owner’s control by purchasing stock from minority shareholders. It also provides a way for business owners to engage in estate planning and reduce their day-to-day involvement in operations. Recapitalization is popular among corporations that want to expand product lines, enter global markets, upgrade production facilities and take over smaller companies.
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Recapitalization
Recapitalization works well with financial growth and scaling plans. Anyone who invests in a company will be able to earn a better ROI on their investments through recapitalization. This future growth could occur through internal expansions or external acquisitions and consolidations. New and small businesses can use recapitalization options to invest in inventory, real estate, equipment upgrades and workforce expansion. Recapitalization is beneficial for companies that have reached the limit of their market share because they can launch new products or services in unfamiliar markets. Business owners can use simultaneous, multiple recapitalization strategies with different financial partners. Using a variety of investors will increase both the risks and the likelihood of achieving objectives. It will also help with gaining additional funding from capital providers and potential partners.
The Down Side
Many business experts and professionals are opposed to certain types of recapitalization. For instance, dividend recapitalization is used when a company experiences severe financial strain or failure. This type of corporate recapitalization is popular among CEOs and investors because it adds another massive debt through paying one-time dividends to shareholders. This means that the existing owners reap the financial benefits of an early payout without any risks. These shareholders are not responsible for any debt if the company goes bankrupt. All loan debts will fall on the incorporated company itself. Dividend recapitalization is highly unethical and unpopular because it rewards corporate avarice while punishing collective integrity. This type of recapitalization has become less popular after national economic meltdowns and corporate controversies.
There are always risks with recapitalization. New equity will likely involve shareholders who want to participate at the board of director’s level. These shareholders will want a solid structure that will ensure the future conversion of investments to cash. These new shareholders may divide personal interests and investment directions among existing shareholders. Those who want to recapitalize a business should consult with finance experts and consultants in order to understand the associated risks, benefits and potential outcomes. Investopedia, one of the leading financial advice websites, offers sound advice on how to recapitalize a business here.
