The Market is Hot to Sell Your Business, But You’re Not; Think
An Often Overlooked Way to Create Liquidity
By Jay Carter, Principal
Charlotte Office, Corporate Finance Associates
The market for selling a family-owned or other privately held
business in North America has never been better than it is today.
This is due in part to the following factors:
- 6 years of continuous
quarterly GDP growth in the U.S.1
- Record levels of money flowing
into private equity funds
($215 billion in 20062).
- Record levels of money flowing
into hedge funds
($1.53 trillion in 20063).
- Readily available commercial
credit from banks and other lenders
- Strong performance at
individual company levels
Combined, these factors have resulted in:
- More Merger and Acquisition activity
- Greater interest in privately-held companies from investors
- Increased competition for acquisition candidates
- Higher valuations being paid for private companies
However, not all owners are ready to sell their privately held
company. Consider the case of Bill James.
The Manteo Manufacturing Company (“MMC”) was founded in 1987 by
Bill James. Over the past 20 years, the company has become a
market leader. Although he would probably not admit it, Bill never
dreamed that his company would be worth $30,000,000. Now that it
is, he feels a heavy weight of responsibility for the wealth he
has created and with which he is entrusted. Selling the company
today may be a good option for Bill, but his preference is to work
for another five years before retiring at age 55.
For the business
owner who is mindful of the risks inherent in keeping “all of his
eggs in one basket”, but is not prepared to exit his company, an
Equity Recapitalization (“Recap”) may be an attractive option.
Here is how it works
An Equity Recapitalization involves
introducing a Private Equity Group as an outside investor in the
business. A Private Equity Group (“PEG”) is similar to a mutual
fund, except it invests in private companies. The PEG manages a
pool of money that is provided by high net worth individuals and
institutional investors (e.g. pension funds and insurance
companies) and invests these funds across a number of different
privately owned companies. It is the PEG’s goal to partner with
successful business owners, acquire an equity interest in their
company, and provide capital and other resources to grow the
company and make it more valuable when the company is sold in the
The table to the right is an illustration of an Equity
Recapitalization of Manteo Manufacturing Company, Inc.4 If Bill
James recapitalizes MMC in this fashion, he would receive
$24,000,000 in cash, representing 80% of the company’s value. This
would enable him to create a well diversified investment portfolio
and secure his family’s financial future, and he would still have
significant upside potential in the company by retaining a 40%
Potential benefits of an Equity Recap to the owner
Liquidity: The owner receives most of the value of the
company in cash at closing, facilitating the diversification of
his largest asset, reducing risk, and preserving the wealth he has
built in the business.
Upside Potential: Owner retains a significant equity interest in the company after the transaction,
retaining upside potential in the company (the “second bite”).
Operating Control: The selling shareholder and his management team
typically retain operational control of the company.
Plan: Management and ownership succession plans are crystallized
through the recap process, removing this uncertainty for the
Reduced Liability: The owner is relieved of personal
guarantees for company debt obligations.
Access to Capital: A PEG
partner is a ready source for future growth and acquisition
This all may sound simple enough, but the process can be
quite daunting for the business owner. Although there is more
private equity available today than ever before, the distribution
of private equity by the 3,000+ PEGs in the U.S. remains very
inefficient. Utilizing an experienced investment banker to manage
this process (allowing the owner and management team to focus on
managing the company) can enhance the value of the company and
increase the chances for a successful outcome. The entire process
can take from 6 to 9 months to complete.
While an Equity
Recapitalization is not for every company, it is an attractive and
often overlooked option to create liquidity for owners of a
privately held company without requiring the immediate sale of the
company. For more information about equity recapitalizations,
please contact your local CFA office.
1. U.S. Department of Commerce
2. The Private Equity Analyst
3. Hennessee Group, LLC
4. Excludes impact of taxes and transaction costs.
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