A private equity recapitalization (“recap”) allows business owners to both sell a portion of their business and  continue to participate in future growth.  Many business owners have most, if not all of their personal net worth tied up in their business.  A recap allows the owner to unlock of portion of this equity permitting them among other things to diversify their financial portfolio and address estate planning matters.

A typical recap involves the partial sale of an owner’s interest to a private equity investor.  The current owner and management team retain operating control as the private equity partner functions more as a money manager and not a business operator.   By partnering with a private equity investor, an owner and his management group gain a dedicated and well-capitalized corporate development partner that can assist in developing and fund, growth and value enhancement strategies.

Not all businesses are ripe for a recap.  Private equity groups are interested in many different industries and business sizes,  although business should generally have at least $8 million in sales and the following characteristics; (1) a history of consistent earnings, (2)  a stable or growing industry and (3) low customer concentration.

The “second bite” of the apple occurs generally four to seven years subsequent to the initial recap.  After further growth and capital investment, the private equity group and owner agree to seek a liquidity of their investment through an outright sale, initial public offering or further recapitalization.   Often, the owner’s remaining equity is worth more than the amount sold in the original recapitalization.

In conclusion, a recap enables a business  owner to realize partial liquidity from their business while allowing them to continue to participate in the operation and the upside potential.  The private equity investor provides the business with the financial resources for future growth and at the same time financially incentivizes the business owner and his management team.

About the Author:  Paul Pillat is a CPA and Certified Merger & Acquisition Advisor and is managing director  at Cornerstone Business Services, Inc. providing merger & acquisition and private equity financing services to middle market companies.   He can be reached via email at [email protected] or call 888.829.9061.

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