Private equity funds offer a way to get a capital infusion for your company for a period of time while maintaining a role in its operation and avoiding a sale or a merger.
It’s called equity recapitalization and it typically involves selling a minority or majority stake in your company to a private equity fund.
With an equity recap, you retain part-ownership and remain involved in the daily operations of the company for an average of five years.
Following that period of restructuring and growth, the equity fund typically sells its ownership stake. Then, a second deal is arranged with the equity firm that may involve the owner:
Choosing Partner Wisely:
Another important element of an equity recap is to find a partner who shares your vision for the company because the private equity fund will play a key role in future growth.
It is also vital to consider how well the personalities will mesh on both sides in the years to come. The current management of the company must feel comfortable interacting on a regular basis with the private equity fund as it will be a partnership going forward regardless of whether a majority interest in the company is relinquished or not.
Typically, companies hire an intermediary such as an investment banking firm to establish a value for the company, help position the company with the appropriate funds, and ensure confidentiality of the process so as not to alarm customers, employees, or competitors. Choose a trusted intermediary you enjoy working with and who has:
Once the private equity firm is selected and a value for the company is determined, due diligence is performed, purchase documents are negotiated, and a closing date is set. The typical process generally takes four to six months to complete.
Equity Recap Candidates
Many candidates for equity recap are private business owners looking for personal liquidity or financing to expand their companies. But shareholder regulations may limit a corporate owner’s ability to liquidate — or sell — a large portion of personal shares, which keeps the majority of the owner’s personal wealth tied up in the company.
With an equity recap, however, the owner is freed up to sell a large stake in the company. An equity recap can offer multiple advantages, including:
1. Diversifying personal wealth.
Despite the advantages, however, if you consider an equity recap restructuring, you should proceed carefully with professional help both during the initial share transfer and the subsequent resale. There are two pitfalls in particular that you want to clarify, both regarding ownership:
Seek Expert Guidance
One of the most important steps when considering an equity recap is to seek expert guidance in the following areas:
Bottom line: An equity recap is a complex transaction that takes several months to complete and also has an interim period of several years. Yet many business owners have found it a preferable path to selling their companies outright or merging with other corporate entities.
About Scale Finance
Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout the southeast including Charlotte, Raleigh/Durham, Greensboro, Wilmington, Washington D.C. and South Florida with a team of more than 30 professionals serving more than 100 companies throughout the region.