The only thing consistent in life is change. Most owners start out when founding a company by working in it. At some point in time, an owner must graduate to working on their company rather than in it. Once the owner has reached that level, the next step is planning and preparing for an eventual sale of their company.

Unless an owner is immortal, the day will come when an exit will occur. That exit can take place in many different ways, however the key is to recognize this will occur and get ahead of it with proper planning and timely execution.

An alternative to a full, or 100% sale, is a recapitalization. In this type of deal structure, a buyer or investor will buy 100% of the existing company and form a new company (“Newco”) with the seller rolling some equity from the sale into Newco. The net result is the original owner winds up with some ownership in Newco.

A properly structured recapitalization can provide a business owner with additional flexibility and a broad range of advantages, both personal and financial, including the following:

• Immediate Cash – A portion of the market value of the company will be paid in cash at closing. This enables the owner to diversify his or her net worth, realize other business or personal goals, or pursue a lifestyle of change.
• Ownership Retention – Retained equity in the company ensures a financial stake for the owner in the future of the company.
• Experienced Financial Partner – The Company will gain a financial partner and investor. These investors are often experienced in assisting entrepreneurs in taking companies to the next level.
• Operating Control – As the focus of the financial partner is on the future of the business and potential return on investment, their primary interest is supporting management in achieving significant growth and profitability. The owner, on the other hand, often retains control of managing day-to-day operations and plays a key role in the implementation of growth strategies.
• New Equity Capital – After years of taking risks to grow the company, entrepreneurs tend to become more conservative in their decision-making and reluctant in their actions — understandably so. Despite this, they know the potential of their company and understand what is necessary to reach that potential. The infusion of capital allows the owner to concentrate on growing the company backed by other people’s money.
• Two-Step Strategy – Often referred to as “two bites of the apple”, a recapitalization presents a business owner with the opportunity to get paid twice, but potentially even more than in a conventional M&A transaction. The second payout will occur after the company has achieved a desired level of growth and increased value that will often proportionally exceed the “first bite”.

Who are the buyers or investors?  Typically these buyers and investors are private equity groups (“PEG’s”). There are many varieties of PEG’s to recapitalize and partner with. Chartered PEG’s are very restricted by their investors in what type of industries and the financial metrics of a target company to recapitalize. Truly private PEG’s, such as family offices, have no restrictions on how they invest. Furthermore, certain PEG’s favor “board level” involvement on a quarterly basis while other PEG’s are more operational oriented.

Typically
these buyers and investors
are private equity groups
(“PEG’s”).

A recapitalization transaction begins, and is conducted, no differently than a 100% sale of a company. Competition amongst suitors will provide the best deal for the seller while allowing the seller to choose the most suitable buyer or investor - mission critical since an owner is choosing a long term partner.

There are over 4,000 PEG’s in America alone today. Open the market and choose wisely.

Since 1989, 30% of the transactions we have closed were recapitalizations. In almost 100% of the time, an owner recapitalizing their company wound up with more money with subsequent sale of the company (second bite of the apple).