Private Equity Recapitalization: What is it and how does it work?

Business owners find it very difficult to part from the companies they built. When discussing alternatives to exit their business, they often ask which is better: selling their business stake entirely or continuing to work with the company and benefiting from its further growth. Many owners are unaware of the benefits of private equity recapitalization as a method to grow value before a full retirement.

What Is Private Equity Recapitalization?

Private equity recapitalization is a financing technique that helps you, as a business owner, sell your business twice: once when you sell your partial business stake to the private equity partner/group, and the second time when the private equity group sells your entire business. It’s like getting to have your cake and eat it, too.

Private equity investors primarily use private equity recapitalization as an acquisition technique. These savvy business partners bring your organization the required capital and expertise concerning company operations and industry know-how. They help your company increase value and sell it for a higher profit.

Private equity recapitalization allows you to sell a portion of your business while retaining some of your equity to take advantage of future growth. Suppose you want to raise funds to support a business expansion plan or pay down your bank debt, you can sell a part of your stake in the company to private equity investors.

By doing so, you meet your business objective to raise funds today, and you also create the opportunity to harvest the value of the equity you have retained in the business when the private equity investors sell the company.

When you retain a part of your equity stake in the business and grow with the company, you earn more profits when it finally gets liquidated.

Private Equity Recapitalization Benefits

Continued business ownership. As discussed earlier, many owners prefer to stay involved in their companies’ operations and decision-making processes. They are not ready to entirely let go of the companies they built. Private equity recapitalization helps them stay and phase out over time when they are mentally prepared to let go. It also allows them to carry on within the company culture they built. Depending on their priorities, they may lead the company or advise from the sidelines.

Equity appreciation and creation of a second liquidity event. By retaining a partial stake in the business, the owners can participate in a second liquidity event in the future when the private equity investors sell the business. The involvement of private equity investors enhances the company’s value, which results in more significant profit that the business owner reaps when the entire business is later sold.

Participate in equity without capital. Private equity investors usually seek and need the active support of the existing management team. They may offer the management team members the opportunity to become equity shareholders via a buy-in or earn-in basis.

Risk minimization. Private equity recapitalization allows business owners to partner with private equity investors and reduces personal risk while remaining with the company. They can minimize or eliminate personal guarantees on company debt and avoid using personal balance sheets to cover the ups and downs. It also helps them make a smooth succession plan as private equity investors encourage reducing or removing business dependence on its owners.

Increased owner liquidity and flexibility to meet priorities. Business owners often have the majority of their wealth invested in the company. Private equity recapitalization allows them to liquidate their interest to meet personal and financial priorities while maintaining the level of corporate involvement they seek going forward.

Availability of funds and enhanced growth opportunities. Private equity investors bring in funds to meet different business needs concerning working capital, strategic acquisition, seizing growth opportunities, accessing the broader capital markets, diversifying, etc.

How Does Private Equity Recapitalization Work?

Private equity recapitalization is a financial transaction that reallocates equity and debt in a business’s capital structure. This attractive exit option allows business owners to liquidate some of their equity stakes into cash while positioning their companies for growth and profitability.

It provides business owners with the flexibility to build a transaction around their needs while retaining one of their company’s most critical assets: themselves.

With this option, private equity investors purchase the majority stake in your business, not the entire company. You retain a substantial stake, which creates a financial and strategic partnership that helps your company grow profitably.

As your company scales and grows, you can unlock the value tied up in your equity stake with a second liquidity event, which may account for the largest portion of your wealth.

When one business partner or shareholder decides to liquidate an equity stake, the remaining ones get a chance to purchase it. If the available cash resources in the company are not sufficient to buy the selling owner’s stake, other shareholders can finance it with equity or debt.

Debt is the easiest and most economical way to arrange for capital. However, when the company cannot avail itself of debt, it invites private equity investors.

Key Takeaways

Private equity recapitalization offers business owners a way to ease away from their companies rather than quitting all at once. Benefits of this exit option include:

  • Creating a double liquidity event
  • Remaining in the decision-making process of the business
  • Providing growth opportunities for the business
  • Flexibility in focusing on personal financial priorities
  • Minimizing risk.

Leverage the benefits of enhanced business value and growth by connecting with the best advisors. They can help you with a private equity recapitalization transaction to meet your business and personal needs while maintaining a stake in your company. Use Value Scout to connect with the most experienced and trusted advisors.

There is no one-size-fits-all formula for exit planning. What works for other companies in your industry may not suit your unique business. Get in touch to know more.

Dan is the Founder of Quantive and Value Scout. He has two decades of experience in leading M&A transactions. Additionally oversees Quantive's valuation practice and has performed thousands of business valuations.



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