NPCA Newsletter: What Happens When Equity Goes Negative
- NP Capital Advisors Team
- 2 minutes ago
- 8 min read
Newsletter article summary: When equity value goes negative, a company’s debt exceeds the market value of its assets. This shifts incentives and creates risk, especially if the problem is layered with cash flow issues. The path out requires increasing enterprise value through margin improvement, cost discipline, and EBITDA growth, while simultaneously restructuring liabilities by working with lenders and vendors to realign incentives and preserve upside. In these moments, cash velocity and proactive restructuring become survival tools that could turn a crisis into a value-creating reset rather than a terminal outcome.
To get in touch, please email us at info@npcapitaladvisors.com.
NP Unfiltered Podcast🎤
In case you missed it, take a look at our latest interactive podcast discussing the very topic of this newsletter: What To Do When Equity Goes Negative. NP partners Nick and Brent offer some great, practical takeaways!
What Happens When Equity Goes Negative
Equity value is essentially the delta between a business's total enterprise value (meaning the market value of all its assets) and its outstanding debt. Put in simpler terms, think of it like a mortgage: if your home is valued at $1M and you owe the bank $800k, then your equity is that $200k stake.
However, capital structures are rarely static. When a company is aggressively leveraged and then met with a sharp market downturn or a dip in valuation, the math can turn sour. If the value of the business falls below the total debt load, then equity goes negative. In this "underwater" scenario, incentives can shift as founders and key team members find themselves working for the “bank.”
If this underwater scenario is more than a temporary blip, you may need to consider restructuring alternatives to get back into positive net worth territory and re-align incentives, helping founders and key team members stay properly motivated and creditors stay calm.
Ideally, you’ll approach this from the two key sides of the basic equation: increasing the market value of your assets while also reducing and/or restructuring your total debt and liabilities.
INCREASING MARKET VALUE
To exit the "underwater" zone, you must aggressively widen the gap between what your business earns and what it costs to run. You can do this by:
Optimizing Gross Margins and Expense Structures: Market value is linked to how efficiently you produce a dollar of profit. Lowering fixed costs and focusing on creating high gross margins provides you with the "oxygen" needed to service debt and reinvest.
Trimming the Fat: Audit your expense structure. If an expense doesn't directly contribute to customer retention or revenue growth, it’s a candidate for the chopping block.
Growing EBITDA: EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is the primary yardstick used by the market to determine enterprise value. To move the needle, look for ways to boost revenue and decrease costs. Auditing your portfolio is key here – identify the "zombie" projects or low-margin clients that drain resources without contributing to the bottom line. Redirect freed-up resources toward your most profitable segments. A lean, high-EBITDA business is far more attractive to a lender looking to convert debt to equity than a bloated, break-even one.
Making Smaller Wins Bigger: Look for small, high-velocity revenue opportunities, which could be upsells to existing clients, minor product tweaks, or niche service offerings.
REDUCING AND/OR RESTRUCTURING DEBT AND LIABILITIES
Using the “Lender Dilemma”
Finance often seems mechanical, but outcomes hinge on human behavior. When your business enters negative equity territory, the psychological weight can be paralyzing. A founder who knows they’ll walk away empty-handed is likely unmotivated to spend time negotiating a sale or driving operational improvements that only benefit lenders. If a captain stops steering because they don’t care about the ship, then the ship hits the rocks, and everyone – including the creditors – can lose everything.
Liability holders often understand this dynamic. This is why they may agree to the reduction and/or restructuring of liabilities. Lenders understand that if you have no "skin in the game," you have no reason to work 80-hour weeks to save the lender’s principal. By ensuring that founders and equity holders retain some upside, everyone is motivated to push toward the best possible outcome.
There is also a "Lender’s Dilemma," which can be a powerful tool for you: the bank owns the debt, but they usually have no idea how (nor want) to run your business. This creates a knowledge and leadership vacuum that you can fill. For this reason, lenders will often work with and not against you. Understanding your leverage points, such as secured vs. unsecured, lien position and status, and the existence of personal guarantees, is critical.
The common scenarios often involve:
A reduced one-time fixed payment to extinguish the debt. (E.g., the lender takes 50 cents on the dollar to go away.)
The lender converts debt to equity and becomes a part owner in the business. By exchanging a portion of what is owed for a percentage of equity, you delete debt from the balance sheet without spending a dime of cash. From the lender's perspective, this moves them from being a "ticking clock" to a "partner in growth." While you may face dilution, 20% of a viable, debt-free company is worth infinitely more than 100% of an insolvent one.
Lenders restructure the debt (typically through push-out maturity and/or reducing payments).
Managing Trade Liabilities
When equity is negative, it is common to have frayed vendor relationships, as it’s likely that – by this point – they have been paid late or not at all. If you have a lot of 60-day+ aged payables, it’s going to hamper your supply chain. Treat your suppliers (and your landlord) as your partners, and communicate openly and clearly.
Vendor and trade liabilities are often the most flexible levers you have since they are unsecured claims, yet founders are frequently too embarrassed to pull them. Vendors are not only your partners, but also typically have a vested interest in your survival. A bankrupt customer is usually the worst-case scenario for them.
Some strategies we recommend:
Proactive Renegotiation & Vendor Hard Resets: Vendors could agree to lower past-due balances and revise payment schedules. Negotiate with trade partners and try to establish a pre-imposed restructuring, or line in the sand, where liabilities before a certain date are treated in one way, and after that date in another. This could be advantageous to all; bringing back the housing example, a landlord would rather have 80% of the rent and an occupied building than a vacant one tied up in litigation.
The Discounted Payoff (DPO): If cash is available, settling for some cents on the dollar can give creditors the certainty they crave while cleaning your balance sheet instantly.
Non-Cash Options: If cash is not available, then strategies like turning past due AP into longer-term notes can work.
CREATING CASH FLOW
In a negative equity scenario, cash is king. You may have to look at your inventory, your receivables, and even your equipment as potential sources of immediate liquidity. High cash velocity allows you to fund the "Discounted Payoffs" mentioned earlier, effectively buying back your company at a discount.
You must be ruthless in your "What-If" analysis regarding your assets. What if we sold the excess inventory at cost just to get the cash today? What if we offered customers a 5% discount for immediate payment? In a healthy business, these might seem like margin-eroding moves. In an underwater business, these are the moves that fund your survival. Every dollar you pull out of the working capital cycle is a dollar you don't have to beg for from a senior lender.
Ultimately, the best small-business CFOs and founders translate these numbers into survival decisions. By focusing on cash velocity and aggressively restructuring every liability – from the senior bank debt down to the utility bills – you reduce existential risk without killing your ambition. You protect the downside so that you are still in the seat when the market turns.
At NP Capital, we see these "dark" periods as the time for a value-creating reset, and we have experience helping many founders and CEOs with this exact dilemma.
Deal Highlights
NP Capital is advising a leading better-for-you frozen novelty brand on a strategic sale and orderly wind-down process. The engagement aligns with the brand’s mission to deliver indulgent, plant-based treats that bring joy through innovative, dairy-free formats and craveable flavors. NP Capital is assisting the client with renegotiating vendor payables, restructuring liabilities, maximizing recovery through the asset sale, and managing an efficient shutdown to preserve value for stakeholders while ensuring a smooth transition. This process positions the brand’s innovative portfolio for continued life under new ownership in the competitive frozen dessert category.
Industry Headlines
Exclusive: Musk's SpaceX in Merger Talks with xAI Ahead of Planned IPO, Source Says
Elon Musk's SpaceX and xAI are in discussions to merge ahead of a blockbuster public offering planned for later this year. The combination would bring Musk’s rockets, Starlink satellites, the X social media platform, and Grok AI chatbot under one roof.
The plan would give fresh momentum to SpaceX’s effort to launch data centers into orbit as Musk battles for supremacy in the rapidly escalating AI race against tech giants like Google, Meta and OpenAI.
xAI shares would be exchanged for SpaceX shares under the deal.
GM Sees Up to $2 Billion Profit Jump in 2026, More Buybacks
General Motors Co. expects profits to grow as much as $2 billion this year and plans to return more of that to shareholders with a higher dividend and buybacks.
The company’s guidance is fueled by demand for its highest-margin vehicles, such as its GMC Sierra and Cadillac Escalade, and a permissive regulatory environment.
GM authorized $6 billion in share buybacks and an increase in its quarterly dividend by 3 cents to 18 cents a share, and now expects to earn between $10.3 and $11.7 billion in net income.
Remy Cointreau Shares Rise After Sales Beat Market Views
Remy Cointreau’s third-quarter sales reached 245.8 million euros, exceeding the 242.7 million euro consensus estimate.
Shares of Remy Cointreau rose 7.7% to 42.2 euros, with year-to-date shares trading 15.2% higher.
The company maintained its fiscal 2026 guidance, expecting stable to low single-digit organic sales growth.
Nike Lays Off 775 Workers as It Boosts Use of Automation
Nike Inc. is laying off about 775 workers at distribution centers as the sportswear company integrates automation into its operations, according to a person familiar with the matter.
The consolidation of operations at US distribution centers will impact workers in Tennessee and Mississippi, the person said.
In a statement, Nike said it’s “accelerating the use of advanced technology and automation, and investing in the skills our teams need for the future.” The company is looking to “reduce complexity, improve flexibility, and build a more responsive, resilient, responsible, and efficient operation.” The company also cited efforts to return to “long-term, profitable growth.”
How the MAHA Era Is Changing Grocery Aisles
Powerful forces are pushing the U.S. food industry to make what could be the biggest overhaul in decades to supermarket shelves.
Cities, states, and the federal government are scrutinizing ingredients in processed food as concern escalates over the state of Americans’ diets. For a lot of consumers, protein and whole milk are in. Seed oils are out.
In response, top food companies from Kraft Heinz to General Mills are reimagining familiar brands as they work to ditch artificial dyes or stuff protein into their products. New federal dietary guidelines released last week could accelerate many such moves.
Walmart's New CEO Takes Over With $1 Trillion Valuation in Reach
Walmart Inc.'s new CEO John Furner is taking the helm with the challenge of maintaining the company's strong growth and preparing for the new era of artificial intelligence.
Furner is known as tech savvy and willing to challenge convention, with a style that is approachable yet willing to challenge people in different areas of the business.
As the company's sixth CEO, Furner must figure out how to press Walmart's advantage and navigate increasing competition from retailers such as Amazon.com Inc. and Target Corp.
About NP Capital Advisors
NP Capital Advisors is a next-generation investment bank and consulting firm founded by a team of experienced entrepreneurs, bankers, and attorneys who have built, operated, and sold successful businesses. The firm offers tailored solutions across M&A, restructuring and turnarounds, and strategy and growth consulting in a variety of sectors. With a performance-driven fee structure and a track record of delivering exceptional results, NP Capital Advisors is dedicated to helping founder-led and emerging growth businesses maximize value and overcome challenges.
