For most business owners, a business sale is a once-in-a-lifetime chance that occurs shortly before retirement. It is a perfectly reasonable approach that often comes with a large payout. Nevertheless, it might not be the most lucrative overall option. Many businesses can fetch a higher price by selling the company in smaller parts through a private equity recapitalization.
Private equity recapitalizations, or recaps, offer a unique value proposition that can be a good option for owners looking to take some chips off the table while still being involved in their company's future.
With a private equity recapitalization or "PE Recap," the investor acquires a majority ownership stake in the company, with the founder retaining a minority stake. The private equity investor will purchase the majority stake using both its equity funds and borrowed funds.
The PE Recap provides you with significant liquidity for financial diversification, wealth planning, and intergenerational transfers.
By maintaining equity in the company, you are positioned to reap the rewards of your continued involvement in the business and the focus, discipline, and strategic resources that a private equity group will contribute to the business's growth. Some owners even go through multiple recapitalizations to several different investors. In time, the sale of your minority interest may become as valuable or more valuable than the sale of your majority interest.
Owners must also consider timing issues and the investment horizon. PE firms typically seek businesses intending to grow the company, then divesting over a four to seven-year period. So owners need to weigh the investment horizon, then consider how this accords with their personal goals. An owner who hopes to retire soon may gain little from this strategy. Owners with a 5-15 year plan, by contrast, may find this approach far more profitable.
Recapitalizations can confer tremendous value, but only if the business can align with a PE firm's expectations and goals. A well-run business is critical to bringing these goals to fruition, and many businesses need outside help to streamline their operations.
Private equity recapitalizations, or recaps, offer a unique value proposition that can be a good option for owners looking to take some chips off the table while still being involved in their company's future.
PE firms can be savvy business partners that bring more than just capital to the table. They also provide industry, financial, operational, and organizational expertise that can be used to increase the value of a business. If the company's value increases, a recapitalization allows owners to profit a second time when the business is eventually sold again.
