Capital Structure: A story every CFO needs to hear

EFFECT PLAYBOOK (Part II)

Frozen growth, despite a hot business

At the time, I was still a banker.

And this founder came to me frustrated.

Their bank wouldn't extend more working capital.

Traditional lenders rely heavily on inventory and receivables but that’s not how their business worked.

The founder was desperate for fuel to keep scaling. And they were about to make a move I’ve seen wreck great businesses:

Taking the wrong kind of debt.

They were about to sign a $5 million subordinated debt (sub-debt) deal from a private equity fund.

At first glance, it looked like a win:

✅ Flexible terms
✅ No reporting covenants
✅ Quick access to capital

But one thing was off…

This company had no debt on its balance sheet. Zero.

No leverage.

No encumbrance.

Just raw cash flow generation.

So, I asked the founder one simple question:

“Why are you paying private equity prices when you’re not giving them private equity risk?”

That’s when it clicked.

Capital Structure isn’t about access to capital, it’s about alignment

I showed the founder a better option: a senior credit facility, tailored to their business model, that gave them:

• Immediate liquidity

• No dilution

• Low interest rate

• And full access to growth capital without margination

It wasn’t flashy.

It didn’t come with a slick pitch deck or “strategic capital partner” lingo.

But it was the right tool for the job.

Why? Because it respected the fundamental equation of capital structure:

Risk vs. Reward.

That PE fund was about to earn equity-like returns (via high sub-debt interest) for taking near-zero risk.

A totally unbalanced trade.

And that’s the danger.

The hidden cost of misaligned capital

Too many finance leaders focus on access to capital.

But the real question is:
At what cost, and under what assumptions?

Here’s the truth:

The wrong capital structure can kill a great business just as fast as a bad product.

The moment you misprice the risk/reward trade-off…you overpay.

You give away flexibility.
You limit future options.
You constrain your strategic runway.

This founder was lucky.

They paused.

They re-evaluated.

And they chose a structure that matched their risk profile.

But many don’t.

And it’s usually not because they’re reckless.

It’s because no one taught them how capital structure really works.

Capital Strategy = Funding + Flexibility + Fit

Here’s the framework I’m sharing with you when someone asks you to optimize their capital structure:

1. What’s the true risk profile of your business?
   Don’t let cosmetics fool you. Evaluate operational risk, cash flow volatility, customer concentration, and runway.

2. What are you trying to achieve with this capital?
   Growth? Liquidity? Acquisitions? Each use-case demands a different structure.

3. Who’s bearing the risk and are they being compensated appropriately?
   Mispricing this leads to toxic deals and resentful partners.

4. How flexible is the capital?
   Can you draw it down as needed? Are there triggers that could call it early? Read the fine print.

5. Where are you in your company’s lifecycle?
   Early-stage may require equity-heavy funding. Mature cash-flowing businesses have more leverage options.

Next Week’s Episode:

🔜 Capital Structure

The silent growth killer isn’t always poor sales or shrinking margins.
For many companies, it’s hiding in plain sight on the balance sheet: capital structure.

When RH’s debt ballooned to over 7x EBITDA, the problem wasn’t just the size of the number, it was what it meant for their ability to grow, refinance, and protect shareholder value.

The best CFOs know that capital structure isn’t just a finance problem.
It’s a strategic weapon or a ticking time bomb.

Next Sunday, we’ll break it all down:

✅ Capital Structure in plain English — how the mix of debt and equity shapes your risk, return, and growth capacity.
✅ The leverage trade-off — why debt can fuel growth or destroy it, depending on timing and alignment.
✅ Key metrics to watch — Debt-to-EBITDA, Debt-to-Equity, Interest Coverage Ratio, and the red flags that scream “danger ahead.”
✅ A 3-step Capital Structure Health Check you can run this week to ensure your funding is aligned with your strategy.

If you want to avoid becoming the next “great brand, bad balance sheet” story, you won’t want to miss this episode.

Disclaimer:
This content is for informational and educational purposes only and should not be construed as financial, legal, or professional advice. Always consult with a qualified advisor before making any business or financial decisions. The author and publisher disclaim any liability for actions taken based on this content.

Talk soon,