Recapitalizations constitute an attractive and growing portion of the merger and acquisition market. Because of their flexible structure, they are becoming an increasingly attractive structure that allows an owner to concurrently accomplish a multitude of goals:
- Provides an immediate, partial or full liquidity event (often called the “cash out” or “first bite at the apple”) for selected (or all) shareholders, which provides a diversification of wealth for a traditionally illiquid holding;
- Allows the existing team to continue to maintain day-to-day control of the business, with the addition of a professional and typically passive Board of Directors that brings relevant experience and industry contacts to bear that will enhance managements’ ability to maximize the value of the business;
- Attracts a financial partner that has “dry powder” capital available to invest in the business for growth objectives, whether it is green-fielding a new office or facility, acquiring an attractive target, or some other similar growth initiative;
- Assists with the transition of the business, as desired to the next generation of executives and managers;
- Creates a structure to provide ownership opportunities for junior members of the management team;
- Allows the existing shareholders to maintain a meaningful and significant ownership position and aligns all stakeholders to grow the business to maximize value for a subsequent liquidity event (the “second bite at the apple”).
As is evident from these benefits, a recapitalization is very different from a complete sale of the company. The existing shareholders continue as managers of the company and the new investment partners are typically members of an institutional private equity (or other similar) group that share the ownership's culture and vision for the future of the business. Unlike strategic acquirers, who often purchase with a view towards eliminating redundant costs, these private equity groups prefer more passive board level involvement and a collaborative relationship with the existing owner and management team. As partners, they are able to bring opportunities to the company that were not previously available, and can provide guidance and input in order to assist the company achieve its next level of growth, which builds value for the benefit of all shareholders.