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Capital Ideas for Private Business

The Market is Hot to Sell Your Business, But You’re Not; Think Equity Recapitalization

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 future.


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% equity stake.

Potential benefits of an Equity Recap to the owner include:

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.

Succession Plan: Management and ownership succession plans are crystallized through the recap process, removing this uncertainty for the owner.

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 capital.

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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