Advivo Business Advisors and Accountants outline what to keep in mind when deciding whether to review your current structure.
Capital structuring and debt can be difficult concepts to comprehend as a business owner; it is a highly specialised area relying on many years of experience, training, and expertise gained over that time. Although you may have previously invested time (and money) in structuring your capital previously, it is important to note that it needs regular reviewing to adjust for changing market conditions, (ie. how much have interest rates on debt changed in the last 2 years?) and your ever-changing circumstances and strategic objectives. Both will influence what is the optimum structure for you and your business.
As there are so many factors that influence and affect the structuring of your capital, it can be tricky to decide if you have the correct balance and mix of debt and equity to have the most cost-effective capital structure, meet your current and future objectives, provide flexibility and secure the future of your business. If this is the case, you may need to review your current structure to determine if it is the most cost-effective, yet safe option for your business. Obviously, the recent significant increases in interest rates have resulted in many business owners asking questions such as do I have the right type of debt? Should I adjust the mix to have more debt or more equity? Below are five questions you need to ask about your business to decide whether it is worth restructuring your capital.
Have there been significant changes in your business’s financial position?
If your business has experienced a large amount of growth (or vice versus) or you expect it to in the future, you should be reviewing your current capital structuring. Debt in particular is extremely complex as there are so many different types, and terms and conditions vary so much. Whilst not seen as restrictive at a given point in a company’s evolution, the advent of time and changed circumstances at a later date may see the conditions constrict the growth of the company, cause conflict with shareholders, or block the ability to effectively succession plan or bring in new investors. The options that arise from a review are enormous; from as basic as deciding to start paying off debts more quickly to reduce interest expenses, to initiating a major equity raise, or floating the company. This can be an extremely complex process depending on the size, and current and future financing needs of your company, so contact Advivo’s Debt Experts if you’re unsure of the best way to move forward.
Have there been changes to the market?
Changes to the market in general, such as raising or lowering interest rates, indicate that it is probably a good time to review your structuring. This is because interest rates affect the cost of debt capital. Thus, if interest rates change, you must re-evaluate how this will affect your ability to service your business’s debt repayments now and in the future and in conjunction with changing or potential changes to market conditions.
Are you wanting to incorporate succession planning or bring in investors?
Succession planning involves planning for substantial amounts of wealth to be transferred as your business adopts new ownership, so it’s crucial that this is taken into account when planning to restructure your capital. In particular multi-generational businesses may have a high reliance on guaranteed support for debt on the more senior and exiting shareholders, and how this will work if they leave. The same applies in family law matters with the demise of a director, shareholder, or guarantor. Whether you have or are planning to bring in investors (or more investors) should also factor in your planning, as this affects your business’s shareholder equity and debt financing. Conditions that apply to your current debt agreements or shareholders’ agreement may not be acceptable to an incoming investor.
Do seasonality differences affect your business’s income?
If your business experiences extreme seasonality differences that affect your income (for example, if you have ‘quiet times’ of the year or weather conditions such as drought that significantly affect your income), this is something you will need to take into consideration when overviewing your capital structuring requirements. Hence the need for robust long-term financial forecasting and ‘what if’ analysis for various scenarios is an essential part of any capital structuring review. This ensures your ability to pay back debts, with an appropriate margin for the unknown, remains evident under all circumstances into the future.
Is my business subject to debt covenants?
Debt covenants are restrictions that lenders build into loan agreements to limit the actions of the borrower and protect their advances. These protect the lender by restricting certain actions by the borrower and are often overlooked at the time in the desire to secure the funding without appropriate analysis of the future consequences. Periodically reviewing your capital structure will ensure that you have the ability to stay within these covenants and avoid default initiating a renegotiation, or refinancing before it becomes a critical problem.
As no two businesses are the same, so too there is no one-size-fits-all when it comes to capital structuring – your chosen structure must suit both your business, your shareholders, and your industry. If you’re unsure about whether your current structuring is the most cost-effective for your business, contact Advivo to discuss how we can take your business to the next level with Debt and Capital Structuring.