A Brief Guide to Recapitalization

Neiman Marcus and J.C. Penney were among the hundreds of companies who filed for bankruptcy following the COVID-19 shutdowns in 2020. These are some of our nation’s oldest and most successful retailers. 

What does this tell us? The financial downfall is an inescapable beast when it decides to come after your business. It may not have anything to do with your skills as a leader. 

During these times, it’s easy to feel helpless. That’s why understanding the ins and outs of recapitalization can spell the difference between your business sinking and floating. 

Don’t wait until you’re in the hole to learn about the complicated, yet worthwhile benefits of recapitalization. Keep reading for a brief overview of what you need to know. 

What Is Recapitalization? 

Recapitalization, or re-cap, is a strategy used to provide a bit more stability to a company. It involves moving around debt or equity depending on the financial situation.

This movement can be crucial for a variety of reasons. For example, if your company is at risk of a hostile takeover, you can issue more debt to make your business less desirable to the hostile. 

On the other hand, you may want to trade in debt for equity to improve the overall wealth of the company. High debt means high interest to creditors, so a simple recapitalization can ease the blow to your wallet. 

Re-caps can also be used in the event of possible bankruptcy. The plan for recapitalization will prove that your business has a concrete idea of how to tighten up. The restructuring of capital presented in court will ease the transition process and get everything back to normal faster. 

Leveraged Buyouts

This is a unique type of recapitalization where a private party will buy some of the company that has a high debt-to-equity ratio. This buyout can also happen during periods of economic drought. 

After the 2020 fiscal year, a leveraged buyout might be just what your company needs. With COVID, it’s no shock that the economy suffered. However, it’s all but guaranteed to boom again. People will be going out and spending money like never before. 

When a positive forecast on the horizon, you probably don’t want to sell. Leveraged buyouts allow you to remain above water. It might sound intimidating at first, but companies like MedWorld Advisors prove that you’re not simply selling your business

This route will allow you to find and form relationships with qualified buyers who have the skills to take your business to the next level. These private equity firms not only bring in the funds for success but oftentimes the experience you may be lacking. 

Planning Your Recapitalization? 

Recapitalization takes many different forms, and there’s likely one that fits your exact business needs. Maybe you would benefit from adding a little debt to scare away hostile buyers, or perhaps you should lower the amount you pay in interest. 

Either way, it’s important that you understand recapitalization and how it can help you before it’s too late. 

For more insider business tips, check out the other informative articles throughout our site.