For many business owners, the initial attraction of a recapitalization — selling the majority of a business to a growth-oriented private equity firm while retaining a minority — is often based on near-term economic and liquidity considerations. However, while those factors often drive the initial decision, a recap delivers a number of longer-term and noneconomic benefits that make a recap a sound strategic alternative.
Continued business legacy
Most middle-market businesses are prominent cogs in the local community and employees, suppliers and charitable organizations alike benefit from the company’s success. Accordingly, the owner may prefer not to sell the business to a strategic buyer that might shut down the company and merge it into existing operations.
Where the ongoing legacy of the business is a concern, a recap with a growth-oriented private equity firm that seeks to double or triple the business in size can be a perfect solution.
Customized role for the seller
As a business grows, the owner often takes on responsibilities that, although necessary for the business, may be personally less enjoyable or rewarding. Dealing with banks, human resource issues, government agencies and the like can detract from a business owner’s enjoyment.
However, a top private equity firm will work with the business owner to craft a customized professional role that that specifically addresses the owner’s desired responsibilities and level of involvement.
Access to capital
As a business grows to represent a higher percentage of a business owner’s personal net worth, the concentration can result in a conservative investment philosophy which can stall growth. Top private equity firms can eliminate this artificial noose by providing assistance in identifying growth opportunities and ample access to capital to fund sound growth opportunities.
A method to reward loyal employees
In most middle-market businesses, equity ownership is concentrated in the hands of a single or few people. However, a top private equity firm will generally seek to expand the equity ownership much deeper in the organization.
Subsequently, when the private equity firm ultimately sells the business, those employees responsible for helping the company flourish can enjoy a payday of their own.
Access to additional management resources
One of the noneconomic benefits of collaborating with a private equity firm is the access these firms offer to managerial resources that may help a business evolve to the next level. Private equity firms are staffed by veteran business professionals with experience in helping companies to expand and succeed. These individuals can help businesses in many ways.
- Capitalize on global sourcing and distribution opportunities. Many middle-market companies don’t have the scale necessary to capitalize on global sourcing and distribution opportunities, and those that do often lack the expertise. By teaming up with a private equity firm with existing capabilities, the company can immediately access markets or suppliers previously unavailable.
- Develop and execute a long-term growth strategy. Top private equity firms will seek to double or triple the size of the business during their ownership. A private equity firm’s experience in capitalizing on internal growth opportunities and executing strategic acquisitions can help a business achieve a level of size and durability greater than is often achievable by a single owner.
- Enact growth-oriented strategic acquisitions. The professionals at private equity firms make a living by identifying and completing acquisitions that increase the company’s competitiveness, size and profitability.
This creates value in a couple ways. First, because smaller, strategic add-on acquisitions can often be purchased at relatively lower valuations, they can be instantly accretive to the value of the existing business. Second, the revenue and cost synergies between the two companies result in a combined company worth more than the two stand-alone companies.
A recapitalization offers business owners the ability to achieve both near- and long-term economic goals, and provides access to the fiscal, managerial and strategic resources that will help entrepreneurs grow and improve their businesses.
