For many business owners, a recapitalization or “recap”[1]
can be an effective way to monetize some or all of your owners’ equity. A recap
can be formal, informal or “de facto.” They are also complicated and require
the services of a sophisticated financial advisor.[2]
Here are some examples of recaps at work:
- A radio station group owner – The group had grown rapidly through acquisitions funded primarily with debt. During a downturn in radio advertising, the group was struggling to cover its debt service and management partnered with a private equity firm to recapitalize the business. Although the deal dramatically reduced management’s equity stake, a subsequent improvement in the advertising environment turned that stake into a home run when the private equity firm later sold the business.
- A family-owned cutting tools business – Warren Buffet’s Berkshire Hathaway is famous for acquiring strong businesses at fair prices while existing owner/managers continue to run the business and retain a sizable minority equity interest. In this case, Berkshire acquired 80% and the founding family retained the other 20% as a long-term holding. In the small to mid-market, Metapoint Partners seeks similar long-term investments.
- A travel services company – The Company recently commenced a tender offer, funded by an increase in corporate debt, to redeem 38% of its common shares outstanding. The result will be a radically different corporate risk profile and, hopefully, a much higher market value per share for the remaining holders.
Under the right
circumstances, a recap can be an effective intermediate or long-term
monetization technique.
[1] This is
the second article in a series illustrating different ways to “monetize
your equity.”
[2] This
article is intended for informational purposes only and does not represent tax,
accounting or other professional advice. Please consult your own professional
advisors before taking action based on the information presented herein.
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