More Business Owners are Looking at Recaps

What is a recap? A recap, or recapitalization, is when the owners of a company sell a portion of the company to an outside party. In today's environment, the outside party is usually a private equity group (PEG), or some other investment group.

Recaps can mean selling as little as 20% equity of the company to 80% to 90% equity. In the case of a minority recap (under 50%), the business owner retains control, but gains financial benefits and professional investment management directed toward maximizing value to shareholders. With a majority recap (selling more than 50%), the investor maintains control of the company, and will want to make sure the next generation of management has an opportunity to obtain some ownership. Although there was a time when most PEGs wanted only majority control, many firms are now enthusiastic about teaming up with management to grow good companies while having less than a controlling interest.

Some reasons for a recap include:

• To minimize some risk of the owner and take some chips off the table
• To buyout retiring or dissenting partners
• To eliminate or reduce debt
•  To fund future growth opportunities, acquisitions, product development, hiring of top executives

Benefits of a buyout include gaining advice from talented people with a different mindset who may be able to grow the company at a faster pace. Partnering with the right private equity firm can provide growth that is much greater and/or faster than the company could have achieved on its own.

We have been involved in some very successful recaps. In one situation, the owner sold 80% of the company. Five years later when the remaining 20% was sold, the remainder was actually a greater amount than the initial sale five years earlier. An investor will not buy a business to maintain slow growth; they will want to see rapid growth, which might include additional acquisitions, additional funding and bringing other expertise to the company.

Characteristics that a PEG will look for in a company will include a good management team, earnings of at least $1 million and growing, and a good plan for the future. The PEG does not want to run the business, so a leader for the business needs to remain if someone else can't be promoted.

Consider how your company could benefit with capital to acquire and grow, and call us if you would like more details on a recap. We have a client looking to put some money to work in a recap situation for an industrial, manufacturing or business service company that generates at least $1 million in earnings.