If you’re an owner that is not ready to retire but wants to realize a portion of the value of your firm that you have worked so hard to build, then maybe you should consider selling a portion of the business. Or as we say in the trade “Take Money Off the Table.” Fortunately, the private equity community is eager to help make this happen.
Over the last twenty years, Private Equity Groups (PEGs) have grown both in number and assets. Today, there are over 6,000 PEGs with over $1 trillion in funds to invest in companies in North America. These large numbers create a very liquid market for acquisitions particularly for Lower Middle-Market firms with revenues between $5 million and $50 million. One type of acquisition they pursue aggressively is known as a recapitalization or recap where the PEG buys a stake in the company instead of a buying it outright.
Recaps come in the form of a majority or minority investment. PEGs prefer to have control so majority recaps are more common but they are increasingly open to minority recaps if it makes sense to their investment goals. As a minority shareholder, PEGs may negotiate veto rights over certain operational and investment decisions, but by and large owners retain most of the day to day control over their firms. Recap investments in companies are designed either as a platform for other acquisitions or as a bolt-on acquisitions for the platform. Your company may be one or the other depending upon the business you’re in or the size of your firm. In either case, the PEG will want to exit the investment in a 5 to 7-year period by selling to another strategic buyer or another larger platform owned by a PEG or by selling the business to the current management.
PEGs like recaps mainly because the owner stays on to run the business so that they don’t have to find someone else to do so. The seller likes them because PEGs are a ready source of growth capital and management expertise if an owner believes the business could benefit from more of both. It also eliminates personal guarantees by the seller on any debt held by the business which may alone be a good reason to entertain a recap. For a family owned business, a recap also allows family members, even those not working in the business, to realize a gain while keeping ownership in the family. Recaps are a real win-win solution for buyers and sellers.