Tax Advantaged Recapitalization – Case Studies

How to use the vehicle of a sale/leaseback to undergo a tax advantaged recapitalization

We had a client that prior to our involvement, had suffered major losses from the departure of three major accounts that had taken their business overseas.  The owner had advanced large sums to keep the business going, since no bank was willing to take a chance on the company after three years of losses and an overleveraged and undercapitalized financial condition.  Since no lender was in the picture, we advised him to consider selling some of the company’s production equipment to him and leasing it back to the company, particularly since the company had rebounded from its earlier difficulties and was now making profits.  The result was an arm’s length sale at the appraised value of the equipment which was significantly higher than its depreciated book value.  A capital gain was incurred but that tax was offset by the cumulative losses of the business.  The owner entered into a sale/leaseback contract with the company and for the first time in three years, was able to receive some compensation in the form of lease payments, the majority of which were, in turn, shielded from tax because of the increased depreciation of the equipment he purchased in exchange for his original debt to the company.  The result was a tax advantaged recapitalization of the company and the road to fiscal health.


Cancellation of a Major Order Leads to Cash Flow Problems

Challenge – Cancelation of a Major Order Leads to Cash Flow Problems

Solution– A client had been working on a major project for over a year when it was determined that work could not continue unless the customer agreed to additional charges. When the customer declined, our client had to cease work on the project. Tremendous expenses had been incurred and, while some payment had been received, it was not enough to cover the expenses and disruption to the flow of business caused by repeated delays and unfunded rework on this project.

We assisted the client to identify the magnitude of the problem and establish a plan to move forward. We drafted a letter, explaining the situation to all of the key vendors involved with the project. We set aside the amounts due to the vendors for this program and it was paid out over a sixteen month period in equal installments. While not the normal commercial terms, all the vendors appreciated the information and being treated equally with other vendors. All went along with the program, allowing the company the time to earn sufficient profits and cash flow to meet these obligations. Not a single vendor was lost to the company in this process, nor did any vendor demand to be paid differently than the plan.

We have found repeatedly that objective assessment, development of a realistic plan, and active communication of the plan to all concerned parties is the basis of maintaining positive relations during a troubled time period.