Private Equity Recapitalization
As a business owner, it can be hard to decide between maintaining business ownership or selling. Many business owners are passionate about their companies and want to remain tied to future growth. At the same time, running a company can be stressful, or the company can get large enough that additional expertise is necessary to grow it to the next level. Whatever the exact situation, the options are not as black and white as to sell or not to sell. There is a third option, where the owner can have it both ways: private equity recapitalization.
In a recapitalization, the business owner retains many benefits of ownership while gaining the ability to diversify assets, lessen ownership stress, and even profit from a second sale.
What is Recapitalization?
A recapitalization is when a business changes its capital structure, specifically in the ratios of debt and equity financing. This can look like paying off debts to increase the amount of equity and decrease interest payments, or the company buying back shares, exchanging equity for debt, in order to return capital to the owners. Or it could be the company issuing new shares and raising additional equity capital.
Private Equity Recapitalization
In the context of private equity, a recapitalization often means the business owner sells part of the business while retaining ownership in the remaining portion. For example, a business owner could sell 80% of the business to a private equity firm. The liquidity from the sale allows the past owner to diversify his or her wealth, pay off debts, or meet personal goals while remaining invested in the company’s growth. Then, when the private equity firm sells the company down the road— typically in about five to seven years— the past owner receives the value of the remaining 20%. Effectively, the original owner capitalizes on the business sale twice. The proverbial second bite of the apple.
Why Recapitalize?
Why would a business owner choose to recapitalize? While every situation is unique, below we elaborate on some common factors.
Ownership Privileges
As stated earlier, some company owners want to remain involved in their company while minimizing burnout and stress. Maybe the owner wants to sell eventually, but is not yet ready to let go emotionally. This allows the owner to slowly phase out of decision-making, often serving as an active advisor to the new owners in the interim. This aspect can help the company, too, as the past owner shares expertise with the new owners— often the private equity firm— setting the company up for continued success.
Private Equity Resources
Oftentimes, the original owner forges a partnership with a private equity firm because the company has reached a growth ceiling in terms of financial resources, expertise, or both. Maybe the next step is to expand into a new market, purchase expensive equipment upgrades, or even acquire another company. Often these bigger changes require significant capital or management expertise, and the past owner may not have these resources. If the owner wants to see continued growth (and benefit from it down the road), then a partnership with private equity may provide the necessary resources.
Delayed Liquidity from Second Sale
This is where recapitalization gets the description “sell your company twice.” The second sale, though a smaller percentage of ownership, can result in a large payout down the road. This is because the private equity firm is often able to grow the company significantly during its ownership period, driving company value up. This amplified growth in a short time window is due to the private equity firm’s management expertise, financial resources, and also collaboration with the past owner.
While 1719 Partners’ ownership period is not limited to five or seven years, we prioritize collaborating with the past owner in recapitalization transactions to set the company up for continued growth. We believe our resources and the past owner’s wisdom creates a powerful combination for success.
Diversification
Even if the company is doing well, it is still risky for the owner to have all his or her financial success tied to the company. There is always the chance something could happen, and the resulting loss could be great. Recapitalization allows the owner to diversify wealth in other investments, decreasing risk, while also remaining invested in the company. Here the past owner gets the “best of both worlds” from an investment perspective.
Is Private Equity Recapitalization Right for You?
There are many reasons to recapitalize, and a variety of benefits for doing so. If your company needs a new area of expertise or increased financial resources, then partnering with a private equity firm to recapitalize might make sense. Or if you would like to retain decision-making power in your business but want the reduced stress that comes with a smaller role, or you would like to take some chips off the table, recapitalization might be right for you.
1719 Partners is experienced in navigating recapitalization transactions, making the best decisions for the company’s future as well as for the owner. If you are curious about the unique benefits of recapitalizing with 1719 Partners, please reach out to start a conversation.