Achieve Long Term Objectives, Operate More Efficiently, and Maintain Business Continuity With the Right Capital Structure
Published: 9th September, 2020
Updated: 16th May, 2023
What is capital restructuring?
Capital restructuring is an operational approach primarily used to deal with changes that impact a business’s financial stability. However, it can also be used to rearrange capital assets to position the company to take advantage of growth opportunities and make it more appealing to investors.
Why does my business need capital structuring?
If done properly, the restructuring can improve the business’s reputation in the marketplace, prompting prospective, current, and former customers to consume more of its goods and services.
What should I keep in mind when structuring capital?
When looking at the right capital structuring for your business it is important to ask yourself…
- Can I afford the repayments / interest?
- What are the terms and conditions?
- Will this structure restrict my businesses growth or inhibit us from bringing in a partner at a future time?
As your business advisor we will take a complete look at your business to understand all aspects that could impact the choice of structure. One of the aspects we look at is appetite for risk; businesses have their own risk profile driven by a range of factors including industry, maturity, scale, management, expertise, client spread, product mix and diversity to name just a few. We will also review your business’s short- and long-term goals and aspirations. We consider revenue, cash flow, cash reserves and debt; we develop accurate and detailed long-term forecasts, as they are essential to ensuring your business’s capital structuring is done correctly!
Not only is the business profile important, so too is the owners profile; addressing such issues as age, marital status, estate planning, legal issues, intent to sell or intent to pass on to the next generation. All of these factors impact on the appropriate structure and we have not even mentioned tax planning considerations.
Our corporate structuring process includes laying out and working through all the issues together and then building the financial model that is most appropriate for your structure. Ironically the same process makes it easier to access the capital from various sources, so the process is a win-win.
How effective is my current capital structure?
People start businesses for different reasons, so the type of structure best suited for your business will depend on what your ultimate goals are.
Possible reasons for starting a business include:
• A desire to create wealth;
• A desire to be your own boss;
• A desire to have greater flexibility;
• A desire to change the status quo.
We often quote Stephen Covey’s second habit which is to ‘Begin with the End in Mind.’ This applies to so many situations and is particularly relevant when setting up a business structure.
Each structure option will have different tax consequences depending on your personal circumstances. There is no one size fits all when it comes to setting up a business, so it’s important to understand how you and your business will be affected by your choice of structure.
In most cases, businesses generate wealth that the owners will want to protect. For this reason, an asset protection strategy is a key consideration when setting up a business. This involves understanding the risk associated with your business and what can be done to minimise that risk to protect your business assets as the business grows.
Tax is another important consideration. Long-term goals can have a significant impact on the type of structure recommended. Choosing the wrong structure or failing to restructure at an appropriate point in time could result in you paying far more tax than you should be. If your primary goal for starting a business is to increase wealth, then minimising tax by structuring your business in the best way, will help achieve this sooner.
What if I have the wrong business structure?
In short, it can be very costly to have the wrong business structure. Many business owners won’t even know if they’ve got it wrong or not. They will continue as they have done, completely unaware of the hidden costs associated with their current operating structure. Unfortunately, their long-term goals can be significantly hindered, taking years longer to achieve, than would otherwise be possible, if they had sought the right advice in the first place on their business structure.
Unnecessary costs of operating in the wrong structure could include:
• Paying a higher rate of tax than necessary, multiplied year on year, significantly hindering wealth creation, and adding years to your working life.
• Potential capital gains tax or state stamp duty on moving business assets that could otherwise have been deferred or possibly not even needed.
• Creating an expensive problem to achieve a succession of business ownership to the next generation of business owners or to bring a colleague into the business.
• Loss of assets or control of the business due to it not being addressed correctly into your estate plan.
Our corporate structuring process includes laying out and working through all the issues together and then building the financial model that is most appropriate for your structure. Ironically the same process makes it easier to access the capital from various sources, so the process is a win-win.
That is why getting the ‘right’ structure may seem laborious, but it is very important.
The team at Advivo have years of experience in this complex field and can help you understand the factors that impact your capital requirements. We will ensure that you have the most efficient and applicable structure for your business. It is very important not to confuse the right capital structuring with the cheapest option available.
Contact us today at 07 3226 1800 or email us at info@advivo.com.au to speak to our team of experienced business advisors and accountants in Brisbane CBD to learn more about our services and to discuss ways to improve your business goals.