Capital Structure What is Capital Structure & Why Does it Matter?

A change in the business strategy will result in a change in the corporate structure. The business strategy can change due to various reasons such as a change in the business environment, merger or takeover of the business, etc. The business strategy changes only if it is an important requirement and without it and if the management gets to know that such a change will positively affect the business profitability. Cash flow is one of the major requirements for a company to survive in the market. Without cash flow, a company will not pay its employees, suppliers, and third parties.

Robbins and Pearce suggest that as the seriousness of financial decline enhances, restructuring options move away from cost reduction to asset reduction. A tracking stock is preferred to a spin-off or a sell-off as this allows the management to have control over the business unit as well as use benefits of synergies and common functions with other business units. Explaining the common pitfalls of the process and advice on how corporate management needs to avoid them.

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Capital structure refers to the amount of debt and/or equity employed by a firm to fund its operations and finance its assets. A firm’s capital structure is typically expressed as a debt-to-equity or debt-to-capital ratio. A successful corporate restructuring is an arduous task and takes up a great deal of senior management’s time. Business Dictionary defines capital restructuring as “Altering the capital structure of a firm; in reaction to the changed business conditions, or as a means to fund the firm’s growth plans”. Financial restructuring involves formulation -of reconstruction schemes and legal sanctions.

Capital restructuring works along the same lines to improve the finances and function of a business in a bid to make it more appealing to investors. 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. In essence, capital restructuring is done to change a company’s holdings and finances.

The reorganization of divisions or a complete firm lets the organizational leaders redesign commercial affairs and roles in a manner that benefits employees. To clarify, this comprises the workers’ movement into distinctive teams or parts and executing systems to boost functionalities. Revenue StreamsRevenue streams refer to the different sources through which the company generates profit, such as selling the products, catering the services or offering a combination of goods and services to the clients. Experts at Enterslice have immense experience in handling restructuring processes for NBFCs and Fintech Companies.

In this agreement, the company’s strategy to pay the corporate debt would be mentioned. Creditors and Lenders are an essential part of the corporate restructuring process. Jongsoon Shin in his paper restructuring and its macro effects explains that it is not necessary that a restructuring will have a positive effect on restructuring. A weak balance sheet of a company can have a negative effect on the corporate’s investments. He states that debt overhang has a negative effect and explaining this he finds the impact of debt hanger on the investment to capital ratio proxied by debt to equity interest coverage ratio.

Why should a Business go through Corporate Restructuring?

The rise in uncertainty and dynamic business environment has resulted in increase in capital restructuring cases in the recent years. EBITDAR—an acronym for earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs—is a non-GAAP measure of a company’s financial performance. Generally, when a company restructures, it lays off some of its employees.

Similar treatment is provided in the Standard for treatment of the balance in profit and loss account of the transferor company. The Accounting Standard 14, which came into force with effect from April 1, 1995, provides two methods of accounting for amalgamations capital restructuring is defined as altering the of a firm namely the pooling of interest method and the purchase method. The pooling of interest method is applicable to amalgamations in the nature of merger. The purchase method is used in accounting for amalgamations in the nature of purchase.

Scope of the study

Due to this, the private company does not need to go through the entire process for applying its shares to be listed in a stock exchange. This form of corporate restructuring is to improve the private company’s business without going through the entire process of applying for an initial public offering. The unleashing of Indian economy has opened up lucrative and dependable opportunities to business community as a whole.

• As economies move from period of high growth / boom period to more sustained periods of growth, present day managements are constantly required to innovate and reevaluate business models to ensure greater focus and maximize shareholder value.
• The unleashing of Indian economy has opened up lucrative and dependable opportunities to business community as a whole.
• Capital restructuring works along the same lines to improve the finances and function of a business in a bid to make it more appealing to investors.
• Especially in cases of financial distress, we can negotiate, on your behalf, with banks on new terms or on amendments on existing contracts.
• Leveraged buyout is an important form of financial restructuring which represents transfer of an ownership consummated heavily with debt.
• Restructuring is when a company makes significant changes to its financial or operational structure, typically while under financial duress.

Despite negative studies and resistance from economists, M&A’s continue to be an important tool behind the growth of a company. Also, the requirement for a corporate reconstruction or restructuring emerges because of the adjustment in the ownership aspect of the company. Likewise, the requirement for corporate rebuilding emerges because of the adjustment in the proprietorship structure of an organization.

A major public relations campaign to reposition the company with consumers. Outsourcing of operations such as payroll and technical support to a more efficient 3rd party. FREE INVESTMENT BANKING COURSELearn the foundation of Investment banking, financial modeling, valuations and more. To clarify, this may also involve the transferral or sale of current equity or liabilities to more encouraging new owners.

Working closely with our M&A colleagues of Crossings Advisory and capital raising experts, we are well positioned to assist you in raising capital, restructuring existing debt or in supporting you with divestitures to strengthen the balance sheet. Our capital structuring approach includes working through all these issues together, and then building a financial model that is most appropriate for your business. Incidentally, the same process makes it easier to raise capital from various sources, which is an added bonus. Private equity is an alternative investment class that invests in or acquires private companies that are not listed on a public stock exchange. Capital restructuring can be compared to the process of repurposing or improving a home. To increase the value of a home and make it more appealing, homeowners usually make improvements and enhancements such as remodeling the house or repurposing the use of some rooms.

Economic profitability / Internal Rate of Return

The mergers and takeovers of multinational corporate houses across the borders has become a normal phenomenon. The real opening up of the economy started with the Industrial Policy, 1991 whereby ‘continuity with change’ was emphasized and main thrust was on relaxations in industrial licensing, foreign investments, and transfer of foreign technology etc. For instance, amendments were made in MRTP Act, within all restrictive sections discouraging growth of industrial sector. With the economic liberalization, globalization and opening up of economies, the Indian corporate sector started restructuring to meet the opportunities and challenged of competition. Conglomerate merger-Generally a merger between organizations that don’t have any regular business zones or no basic relationship of any sort.

SKILLS REQUIRED TO WORK ON CAPITAL RESTRUCTURINGS

Restructuring can be a tumultuous, painful process as the internal and external structure of a company is adjusted and jobs are cut. But once it is completed, restructuring should result in https://1investing.in/ smoother, more economically sound business operations. A company may restructure as a means of preparing for a sale, buyout, merger, change in overall goals, or transfer to a relative.

The analysis will be done for each company separately and then be compared with companies adopting similar form of restructuring in order draw inferences on success or failure of such restructuring. Another important aspect that we will try and cover is measuring the real value gain to shareholder post the capital restructuring process. There is a need for outcome to be measured quantitatively, in order to make to evaluate and conclude, whether capital restructuring resulted in any tangible gains to the shareholders. In the paper on the ‘Study of implication of corporate restructuring’ by Dr. Bernadette D’silva and Mrs. Annie Beena Joseph have described the process of corporate restructuring as redesigning the Company. The authors point out that corporate restructuring is applied based on needs of an organization and it invariably differs in each case.

The endeavour may not be making sufficient benefit required to take care of the capital expenses of the organization and may cause financial misfortunes. The lacklustre showing of the endeavor might be the aftereffect of an off-base choice taken by the administration to begin the division or the decrease in the benefit of the endeavor because of the adjustment in client needs or expanding costs. In a leveraged buyout transaction, a firm will take on significant leverage to finance the acquisition. This practice is commonly performed by private equity firms seeking to invest the smallest possible amount of equity and finance the balance with borrowed funds. There are many tradeoffs that owners and managers of firms have to consider when determining their capital structure.

It is particularly beneficial when negative synergies exist or diseconomies of scale exist in a company / conglomerate (It also manages to bring more focus to separate business and allows them to benchmark themselves against relevant industries. Capital restructuring is a tool that more and more companies are adopting to course correct a downward trajectory of declining returns. With the impact of COVID-19 and the changing conditions in general, we will see, more and more, the negative impact of poor capital structuring. We 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, for now, and for a bumpy road ahead. A company undertakes a restructuring to modify the financial or operational aspect of its business, usually when faced with a financial crisis.