The 'Partial' Exit
- Cash In and Stay Involved
[fname], what if you could cash in on your business, diversify financial
risk, and still keep your job? In other words, have your cake and eat it
I know what you're thinking - too good to be true. Actually, it's more
than true; it's one of the most popular forms of 'external' business
transfers. The private equity group
'recapitalization' or 'recap' provides the best of all worlds to
the business owner looking to cash in and stay involved.
Why Choose a Recapitalization?
The simple answer is - Perhaps you're not yet ready to walk away completely.
Even if you're not sure, this 'partial' exit strategy is worth exploring.
Here is an overview so you can decide whether this strategy fits your Goals.
On a basic level, a recapitalization of a privately held business refers to
the sale of a controlling stake in the entity - most likely to a
private equity group. 'Private equity groups' collect capital from investors
and provide an otherwise unavailable opportunity to invest in privately held
businesses (they also take publicly traded companies private). Attracted to
the high private equity returns of recent years, investors have increasingly
steered investment dollars toward these groups, making 'recapitalization' a
much more viable option for business owners looking to achieve a 'partial
Still with me? Let's get more specific. A private equity group
invests in a controlling (51% to 100%) stake in a private business, while
the business owner usually keeps anywhere from 1% to 49% ownership and
continues to manage the business. The structure serves several purposes.
employment contract allows the equity group to take advantage of the owner's
business expertise within the day-to-day operation.
ownership, even at a minority level, properly aligns the interest of both
business owner and equity group investor toward growing the business.
This owner now stands to benefit from a second liquidity event years later,
referred to as a 'second bite of the apple', when the private equity group
sells the entire company.
Assuming the private equity group has invested new capital and management
resources in the business (beyond what the owner could bear as a 'personal
cost'), the 'second bite' can be worth more money then the original 'recap'
value. In this transaction, everyone wins, as the private equity
investor takes on risk to gain a large piece of the upside while the
business owner diversifies risk and keeps a hand in the business - both
professionally and financially.
What's the Rub?
Don't all rewards in business and life come with risk? In this instance, the
biggest risk is loss of control along with that sale of a majority stake.
All discretionary decisions, from strategy to financial, must pass muster
with the majority owner. For instance, an owner might see an opportunity and
want to simply take it. But now he must answer to someone, even if he
feels he knows what's best for the company. If differences of opinion
regularly arise, he may resent the veto power of the equity group, which can
in turn hinder business growth.
The key to success with this type of transaction is making a good
'cultural' match between private equity group and business owner. Owner
(and advisor) will want to look for an equity group that shares his vision
for the company's future and is willing to finance it and provide
Best of All Worlds for the 'Torn' Owner
Many business owners are not ready to quit cold turkey. It's a daunting
prospect; after all, the business has become your life over the last many
years. Take a look at your personal Goals. Some of them might appear
conflicting. If you're torn between your business and the unknown of
retirement, consider exploring this 'partial' exit strategy in more depth. A
'recap' can reward the right owner with a way to cash in some chips,
diversify risk, keep a hand in the business and participate in future
As always if you need some advice, you're
welcome to email me of call me here at the office at 281-993-4530.
Charles Wilson, CPA/CFF, CGMA, CBEC
Charles Wilson, LLC
307 S. Friendswood Dr, Ste B-2
Friendswood, TX 77546
Charles Wilson, CPA/CFF,
CGMA, CBEC is a Certified Business Exit Consultant and is affiliated with
Pinnacle Equity Solutions, Inc., an Exit Strategies Training and Solutions
company. Parts of the content in this email are taken from previous
Pinnacle Equity Solutions, Inc's. newsletter library and website in
accordance with Charles Wilson's certification in Pinnacle's Certification
and Membership Program. All Copyrights are the properties of Pinnacle Equity
Solutions, Inc. and Charles Wilson, LLC and their respective owners.