How capital structure can save a company
When financial woes took a bite out of Apple ($127 million), Texaco ran out of gas ($10.5 billion), and the fun stopped at Six Flags ($2.5 billion), they all received the same defibrillator: capital structure. Whether a company is on its way to the ER or just has a small cough, capital structure often is the best prescription. With thoughtful planning, it can act as the preventative medicine an organization needs to stay healthy.
Capital structure is how an organization builds growth capital into the framework of its financial "building." When external funds are needed, a company can finance its capital flow using one of two solutions: debt or equity. In the wake of the 2008 financial collapse, both have gotten a bad rap, but whether an organization needs a mere $127 million or $10.5 billion to pump it back to life, nothing does the trick as well as OPM (other people's money).
Debt to Extend Your Runway During Takeoff
When many startups encounter unexpected and expensive obstacles, they opt to close their doors while the principals can still recover from the failure. But if a young company is taking too long to get off the ground, debt financing can be a good choice to give it a little more runway.
Debt financing is a prudent choice during takeoff because, unlike equity financing, the company can control how and when the long term debt is repaid. With equity financing, the “payoff” extends either forever or until the equity partner is bought out. On the other hand, debt financing provides freedom: When the company has taken off, the runway no longer is needed, and the organization can elect to pay off its debt quickly.
While debt can also be an effective way to fund short-term recovery and growth measures, the right equity partners can bring a lot more to the table.
How Dynamic Equity Partners Can Save a Company
In some instances, a company starts to steadily leak money, and the problem isn’t detected until the leak has begun to gush. In worse situations, a company is running out of both money and ideas. This is where capital structure can be used to both plug the leak and find new streams of cash flow for the organization.
For founders and executives, failed strategy can be a tough pill to swallow. Pride takes over. Soon, the hunt for equity financing is narrowed to a search for silent partners, who merely bring cash (which could be misappropriated, and exacerbate the problem).
While a silent partner can be a double-edged sword, a dynamic, working partner can be a twofold solution: They bring both money and fresh ideas. This new inspiration can be the jolt that revives the organization. Consider the example of Marvel.
For years, the word “comics” was stuck to Marvel like a suffix. When the company filed for bankruptcy in 1996, it was in need of superheroes. With a new vision and innovative thinking, Marvel altered and increased its capital structure, shifting resources away from comics and toward making movies — and the rest is cinematic history. The combination of freshly infused money and a change in direction made Marvel the powerhouse it is today.
The Power of a Proactive Company’s Capital Structure
Apple, Texaco, Six Flags and Marvel prove it’s never too late. It’s also never too early to start planning capital structure. Once an organization sees the value in active, dynamic partnerships, it can plan its growth funding strategy accordingly. In this way, potential tragedies are averted, the leadership retains working capital control and the company is kept off the stretcher.
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