Unlocking the value of your company Featured

8:00pm EDT August 29, 2006
In today’s debt capital markets, middle-market companies have greater access than ever to financing alternatives to help them to achieve their business objectives.

Smart Business sat down with Doug Shaffer, senior managing director of PNC Capital Markets LLC, to learn more about one financing alternative, dividend recapitalizations.

What is a recapitalization?
Recapitalizations involve the infusion of capital and, potentially, certain parties taking money out of the company. In a leveraged recapitalization, a company takes on debt with the purpose of either paying a large dividend or repurchasing shares. Recapitalization financing is an important liquidity tool that can enable a business owner to achieve personal net worth diversification and liquidity while preserving the business and protecting the jobs of employees.

Why should a middle-market company consider a recapitalization?
Often, middle-market business owners have the bulk of their personal net worth tied up in one asset: the company. Many business owners and management teams eventually reach a crossroads. Should they take on outside financing to fund future growth? Should the shareholders diversify their personal net worth by selling stock in their business to provide liquidity and enhance their financial security? If they do so, will they have to give up the operating control that made their companies successful in the first place?

Business owners may use recapitalization financing to fund partial distributions or to facilitate ownership transitions and help execute succession plans to the next generation or to management. It is also an alternative to the outright selling of the company or taking the company public.

In today’s world of Sarbanes-Oxley requirements, keeping the company private may be a strategic goal, and a recapitalization is a financing vehicle to provide the capital to assist management in achieving their business objectives.

What are the advantages of a ‘recap’?
By using debt financing to pay a dividend to shareholders, business owners are effectively reducing the risk of having a significant portion of their wealth invested in the company while retaining ownership control. Leveraged recaps may not be suited to every situation, but if the circumstances are right, they can provide a viable — and valuable — alternative to wrestling with the decision of whether to sell a company.

What cautions should a company consider with a recapitalization?
As a company takes on additional debt, it is important to recognize that future cash flow needs to service the debt may conflict with capital expenditure requirements. Additionally, a more levered balance sheet may reduce the flexibility to make opportunistic investments. Despite these considerations, recapitalizations have become quite prevalent in today’s market and are an attractive alternative for a business owner wishing to convert some of the value in the business to cash without actually selling the company.

When is a company a candidate for a recapitalization?
A few of the key attributes that a company must have to provide for a successful recap include a strong management team, a history of growth and profitability, realistic growth opportunities, a leading market position or a defensible market niche, predictable/stable cash flows and an un-levered balance sheet.

How is a recapitalization financed?
Financing for recapitalizations can be obtained from a variety of sources, including the bank market and the public and private financial markets. The decision regarding the type and level of financing to be obtained involves the careful review of a number of questions.

  • What is the size of the company?


  • How much debt can the company’s assets reasonably support?


  • How much debt can be reasonably supported by the company’s cash flow?


  • What level of leverage are the owners comfortable with?

What is the role of a financial adviser?
First and foremost, seek the counsel of a financial adviser well-versed in these transactions. The help of a trusted financial adviser is important when reviewing the above questions and deciding on which sources of capital to tap for financing.

A trusted adviser will provide the financial expertise to help a company’s owners achieve their strategic business goals, such as acquisitions or expansion plans, as well as personal goals, such as diversification of wealth.

This was prepared for general information purposes only and is not intended as specific advice or recommendations. Any reliance upon this information is solely and exclusively at your own risk.

DOUG SHAFFER is senior managing director of PNC Capital Markets LLC. Reach him at (412) 762-4336 or douglas.shaffer@pnc.com.