FOR AND AGAINST RECAPITALIZATION

Recapitalization is the financial reorganization of a company's debt and equity mix. The aim is to improve a firm's capital structure. Essentially, the process involves the exchange of one form of debt or equity for another.

FOR RECAPITALIZATION

Stabilizing the Corporate Capital Structure

In distressed situations, a recapitalization can stabilize your firm's capital structure and cash position. This can be achieved by renegotiating terms with lenders by trading existing debt for new debt with lower interest rates or longer maturity; or by simply exchanging debt for common stock.

Providing Liquidity

By raising debt or equity a company consequently increases its liquidity that may be needed to finance further investments, or even an owner's partial or full exit.

Partial Sale of Your Company

A recapitalization gives you the possibility of taking cash out of the business, by selling a minority or majority stake in your company. In particular, owners may consider this option a few years ahead of retirement.

You can earn a pay day today, along with another pay day in a few years time after new investors have hopefully grown the company and increased the value of your retained equity stake. As an owner, you get to take cash off the table, reduce your risk and diversify your investments. An owner would typically be tied to a management position in the company for a period of time.

Bringing in a Capable Partner

In an equity recapitalization, you benefit from the strength of a new owner. It is important to take time to identify the right investor to partner with. You should investigate their previous experience, track record, credibility, motivation and financial stability.

If both parties share the same vision for the future growth of your company, you can benefit from the new equity investors' broad range of operational and strategic experience, as well as their investment dollars.

Increasing Management Discipline

Increasing your company's debt leverage often has a disciplining effect on management as a result of the financial and operational restrictions involved. This discipline can trigger more thorough financial analysis before major decisions.

AGAINST RECAPITALIZATION

Operational and Financial Restrictions

If you choose to raise debt rather than equity, it will bind your company to financial covenants in the credit agreement and place restrictions on investments and distributions to owners imposed by the lenders. Furthermore, costs increase as lenders charge monitoring and maintenance fees on the loan.

Loss of Control

New equity investors (even minority investors) are going to be involved in important strategic and financial decisions. Owners can become frustrated with the direction of new investors. As part of your due diligence, you may even want to talk to other entrepreneurs who have partnered with your new investors or sold companies to them in the past.

Loss of Strategic Focus

In some cases, new equity investors will focus almost entirely on the financial performance of the business. Often, they have limited partners in their equity fund, who expect a minimum rate of return on their investment. On the plus side, their focus on financial rewards should lead to a great second pay day in a few years. On the downside, you may feel that you are abandoning the way you have successfully run your business over many years.

In summary

Recapitalizations are a great tool and often provide the dream exit for a business owner. However, it is a lengthy and time-consuming process, so you may be well served by seeking advice from professionals who have been through the recapitalization process countless times before.

ClearRidge has a strong track record in recapitalizations. Our team works together on every project and we can all pool our ideas to help you determine if a recapitalization is the right tool for you and your stakeholders.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge provides Restructuring, Corporate Finance, Merger & Acquisition and Turnaround services for midsize companies.

Restructuring includes financial, operational, strategic and pre-Sale restructuring.

Corporate Finance includes advisory for raising and replacing senior, subordinated or mezzanine debt, as well as raising and replacing equity to provide the lowest cost of capital.

Mergers & Aquisitions includes buying, selling, merging and valuing midsize companies.

Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management.

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We have directly owned, operated and managed midsize companies. We know the business from your perspective.