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Add Recapitalization Agreement signed

hello and welcome to this video module on leveraged recapitalizations a leveraged recapitalization also known as a debt recap is a transaction that involves adding new debt to a business's balance sheet in order to provide liquidity also known as a cash payout to existing shareholders a debt recap looks a lot like an LBO but is often completed without any new equity coming in it can be completed with new equity where there's not a complete by out of a business without new equity the debt proceeds basically go directly to the owners typical deal involves adding debt either bank debt or bonds to the capital structure the proceeds of the debt are then used to either pay a dividend to shareholders or to buy back company stock in either case it puts cash in the hands of existing shareholders the new debt is frequently a cash flow based loan where the amount of the borrowing is a multiple of EBITDA financial modeling is very important to this process because projections are used to prove the borrower's ability to repay debt bankers also have other roles such as finding lenders possibly finding outside financial sponsors successful privately owned businesses can complete a series of debt recaps over time putting cash in owners hands each transaction a common exit route from a pattern of recaps as an eventual IPO in which the proceeds are used in part to repay debt that's basically because IPO investors don't normally like to know that the proceeds of their investment will be going to pay selling shareholders but they're often fine with the proceeds of an IPO going to repay debt so you'll often see a recap loading up a business with debt followed by some times within the same within the same year followed by an IPO one of the main reasons behind the debt recap first and foremost of allow shareholders to receive cash while still retaining ownership of a company basically eating your cake and keeping it it allows business owners to put cash in their own hands it's a form of a liquidity event up there with a sale of a business or an IPO but there's drawbacks drawbacks to every every transaction but with an IPO shares are being sold to the public there's a whole lot of disclosure requirements file quarterly filings annual filings that just basically can Adam what's what may be seen as a burden to the company and an outright sale of a company well it's a great liquidity event but existing owners don't get to them participate in a future up side of the business a leveraged recap can provide a better use of funds for an IPO as you mentioned repaying debt versus paying cash to shareholders it can serve to keep management focused basically by taking cash off the balance eat you're you're taking out a buffer or a cushion that management can get complacent with debt recap often requires monthly payments to a lender so you're basically making manage making management run a tight ship a recap made tudor hostile takeovers basically removes cash from the balance sheet as we know from our previous modules cash on the balance sheet can be used by an acquirer to offset a purchase price and debt recap also by adding debt to the balance sheet it can deter a takeover by not allowing new buyers to load up the balance sheet with additional debt leveraged recap can be accompanied by significant tax advantages the interest on debt is tax deductible and dividends may have preferential tax treatment or if it's a shared by back if the shares have been held long enough that could also be preferential capital gains treatment finally debt recap may reduce an owner's liability as cash has taken off the table if an owner is thinking that his or heard a lot of the net worth is tied up in the business something technically could happen there could be a lawsuit in the business some sort of major change that affects the value business well by taking some cash off the table that owner knows that he or she has a bit of a safety net and doesn't have as much of his or her net worth tied up in the business let's consider a real simple example a company that has two million of EBITDA is determined to be worth 10 times EBITDA just based on based on its industry that's what the investment bankers have told it the investment bankers go out and find a commercial bank that agrees to lend five times EBITDA so it's going to land 10 million dollars to the business well the owner has a few choices the owner can simply take on the 10 million dollar loan into the business pocket all the proceeds and still retain one hundred percent of the business so basically your enterprise value is still 20 million whereas before it was 20 million all of equity now it's 20 million 10 of debt 10 of equity or our owner here can take on an outside investor and if she takes on an outside investor she can pack it even more cash but the sacrifice for that is that her ownership percentage will be reduced so let's say she takes on an investor who buys forty percent of the equity well forty percent of 10 million so that's an additional 4 million so she can pocket 14 million dollars and still own sixty percent still in a majority of the business let's say she sells fifty percent well she's going to pocket 15 million again 10 from the debt five million being half of the 10 million of equity but think about it this way she's just realized 75% of the company's value so 15 of 20 million as cash in her pocket but she still owns half the business if she sells a majority she can pocket 16 million by selling sixty percent she's realized eighty percent of the company's value and still retains forty percent of ownership that's the power of leverage that's why companies complete the leverage recaps and that's how banks get involved please join for the next module you