A recapitalization is a transaction that results in a change of the capital structure of the company. This can be part of the implementation of the ownership transition strategies considered by a business owner. For example, the use of debt or equity capital in achieving a family transition, ESOP or management buyout will cause the company to be “recapitalized.” In addition, the types of securities to be held by ownership groups may be restructured as part of a recapitalization in order to match the investment expectations of different ownership groups. Convertible debt, preferred stock, convertible preferred stock and senior classes of common stock are frequently created for this reason.
Recapitalization can also be considered when current value isn’t enticing enough to support a transaction at the present time. In a situation like this, recapitalization may be used to improve the value trajectory of the company in advance of the implementation of an ownership transition event.
If, for whatever reason, the value of the company does not meet your expectations, what should you do? There are several options:
- Take the necessary steps to improve the company's financial condition by restructuring/refinancing the balance sheet
- Obtain the necessary capital to grow your existing business to the next level
- Obtain capital to expand into new growth areas
- Make a strategic acquisition
The decision to pursue any of these alternatives can raise a number of complex issues. Will you be able to accomplish your goals through the use of senior debt only or will some form of mezzanine financing be required? In many cases, it is common for subordinated debt lenders to ask for and receive some form of return enhancement through warrants or other equity components. The need to raise equity should be selective as it can be expensive – and potentially dilutive. Each step along the capital raising road exacts a higher price from existing shareholders. The decision you make can materially change the capital structure of the business and your ultimate exit strategy.
Prairie Capital Advisors, Inc. has significant expertise in the design and evaluation of sources of capital and design of securities to be used in recapitalizations. Traditional bank financing might not be the right source for all the funding – subordinated debt, equity and seller financing are all possibilities. The corporate finance and investment banking experts of Prairie Capital Advisors will help you structure the transaction, advise on the impacts of selecting different types of capital funding and manage the transaction to its successful completion.
