Should You Consider a Recap? Part 5

Should You Consider a Recap? Part 5

By Robert St. Germain

April 03, 2012

Money BlocksIn the last four blog posts I have discussed the different types of middle market business buyers in the market today, how they differ and what they look for when they invest.  Now that we know about the buyers…is there anything the seller can do to make sure the transaction runs smoothly?

If all the prerequisites have been properly put in place, the seller has at least one more tool to extract the highest price and best terms from the PEG marketplace. That is a well constructed, competitive sale process consistent with the protocols and expectations of the PEGs. As with selling to any third party, competition among potential buyers can help maximize the outcome for the seller.

When the most viable PEGs emerge from the competitive process, the seller should conduct due diligence on them just as it can be expected they will do on the seller. Chemistry with the PEG principals should be evaluated because they will be the ones serving on the seller’s board post-close and as partners for the next five years or so. The seller should also speak with the CEOs of the PEG’s current portfolio companies to learn from them what it is like to work with their PEG owners. A good PEG will be happy to make introductions to its CEOs.

To summarize, there can be many advantages to a recap for a seller. First, sale to the right PEG can produce the same full valuation and price as that from a strategic buyer. Second, the seller gets to retain an ownership stake in the company post-close while, at the same time, reducing their investment risk through the harvesting of some equity (i.e. “taking some chips off the table”). Third, the seller can maintain employment typically under the requirements of an employment contract. Fourth, the seller gets with a PEG a strong financial partner that can help grow the company at a faster pace than would have been possible otherwise. Fifth, that faster pace of company growth can significantly increase the value of the seller’s retained ownership stake, which will be realized (i.e. “the second bite of the apple”) when the PEG eventually resells/IPOs the company.

So, should you consider a recap? The answer is yes, if you want a fair price for your business plus a retained ownership stake with good upside potential plus continued employment. A recap executed with the right PEG can be the restart of a great future.


Posted by Robert St. Germain.