Do you ever dream of retiring, selling the business, and sailing off into the sunset? Many business owners do, but what stops them from making that dream a reality is the realization that they’d miss the day-to-day involvement in an enterprise they invested their time, money, and efforts into, usually for many decades. The temptation to cash in is balanced by their enjoyment of running the business and continuing its growth. Others still have a few years before they’re ready for retirement. Shakespeare’s Hamlet asked the question “To be or not to be” and business owners ask the same for their businesses when they are nearing a “sell/don’t sell” decision. Fortunately, there’s a third way to go that allows you to have your cake and eat it too.

The THIRD OPTION: You’ve positioned your business well. Now you need to make a decision. Between the Sell and Stay options is a third pathway that combines the best of the first two. It’s called a Private Equity Recapitalization, or “Recap”. Recap is a financial technique that allows you to take “some chips off the table” now while you continue to stay involved with management and decision-making if you desire. A Recap gives the owner an opportunity to unlock a portion of the value tied up in the equity of the company and creates a liquidity event for what’s probably the largest portion of his/her net worth.

The Recap benefits don’t stop there. This technique allows the owner to take a second bite of the apple when he/she sells the business in the future. Most private equity (PE) firms have a five- to seven-year horizon when it comes to building and selling a business. If this time frame works for you, it is theoretically possible to make as much from your second bite of the apple as you did in your initial liquidity event, when you sold your minority or majority interest in the company.

FLEX APPEAL: Previously, most PE firms would only consider Majority Recaps, which gave these PE firms a controlling interest (51% or more) of the company. Today’s marketplace has introduced a welcome flexibility with some PE firms willing to purchase less than 49% interest in the company and allow the owner to keep control. The decision involving what percentage of the company you would like to hold onto certainly deserves consultation with an investment banker and your financial advisors.

TEAM BONUS: Recaps can be good for management teams as well. Besides the benefits to the owner, they also provide the teams with a chance to participate in the equity of the business – even when they don’t have the capital to do so. Since private equity investors usually require and actively seek the support of the management team, it’s likely they may offer top management the opportunity to participate in the equity of the business, either on a buy-in and/or earn-in basis.

In the next few years, baby boomers will continue to retire in record numbers. Fortunately, boomer business owners now have some attractive alternatives to exiting their businesses outright. Today they can modify the company’s capital structure in a way that’s consistent with their plans and objectives, as well as those of the company. A Private Equity Recapitalization makes it possible for:

  • Business owners to realize partial liquidity of their business interest while continuing to participate in both the operations of the business and its upside potential.
  • The management team to become shareholders in the company and…
  • Most importantly, the business will have the financial resources required to support its future growth.

Recap is a winning technique for business owners. It allows you to sell and stay – then sell again for a second bite of the apple!

For more information about Recaps and other exit options for business owners, feel free to contact Touchstone Advisors for a confidential discussion.


Steven Pappas
Touchstone Advisors