Structuring
What is it?
Structuring is the determination of the ideal mix of debt and equity to permanently fund a company’s long-term capital.
Key Features
- The combination of debt and equity capital used to finance a company’s operations and purchase of assets.
- A prudent capital structure would seek to leverage effectively while not exceeding debt capacity, maintaining control and solvency of the company with an aim to ultimately achieve greater profitability and growth
- Typical participants: Management, board of directors, external capital and strategic advisors.
Execution Process
- Proposed approach will be dependent on participants, whether be it heavily structured or open to flexible arrangements
Key Considerations
- Firms make certain tradeoffs when it comes to utilizing either debt or equity more than the other
- Risk-reward ratio must be well-balanced to sustain financial health and solvency
- The best capital structure differs from industry to industry due to the inherent nature of different businesses
- Different capital structures result in different returns on capital
- The complication lies in accurately determining the desired blend of capital and balance between debt and equity
- The structuring should consider possible accounting, tax, commercial and cash flow consequences
What Participants Want
- An optimal capital structure as it is crucial in maximizing growth and operating efficiencies
- Information typically required includes:
- Financials of the company
- Cost of debt capital
- Cost of equity capital
- Weighted average cost of capital