Private Equity Recapitalization: The Staged Exit


By: Zane Tarence

Many business owners believe selling their company is the end; they hand the keys to the buyer and they walk away. While some desire this outcome, particularly those who are nearing retirement, many business owners are still passionate about what they do, love their team, and want to see their company continue to grow. At the same time, they understand the risk in tying most of their wealth up in the business and may also realize that additional capital (i.e. more risk) and expertise is needed to take their company to the next level. If you’re in this situation, you might consider a recapitalization.

A recapitalization is a restructuring of a company’s debt and equity allocation, and can be accomplished by selling varying portions of your business. Private equity groups generally want to purchase less than 100% and want the business owner and the management team to remain in place after their investment. They are investing in you and your team as much as they are in the business. This provides you with some liquidity (reducing risk) while also supplying additional financial expertise and capital to help you execute your growth strategy.  Generally, a private equity firm wants to grow the business by 2-3X in order to sell it again in 3-5 years. By participating in a recapitalization (assuming the desired results are achieved), the business owner has the ability to make as much or more in the second transaction as the first.

To illustrate the steps in a staged exit process, let’s assume your business is worth $25M.

1. You sell 60% of your company for $15M and retain 40% of the business.

2. You and your team continue running the business and as you hit certain performance thresholds (agreed to in the first transaction), you receive an earnout payment of $5M

3. The Company sells in a second transaction for $50M, providing you with an additional $20M in exchange for your 40% equity.

In this staged exit, you realize a total of $40M in liquidity.  You took some risk off the table in the first transaction and through your partnership and hard work, achieved a second liquidity event larger than the first.

As you can imagine, successful recapitalizations largely depend on picking the right partner, and in our experience, this is best achieved by running a competitive market process.  This proactive process puts you in the driver’s seat by providing you with multiple options.

To learn more about the process, see the blog “Understanding How M&A Advisors Make A Market” or read our eBook, “How Private Businesses are Valued, Bought & Sold”.

Founders Investment Banking (Founders) is a merger, acquisition & strategic advisory firm serving middle-market companies. Founders’ focus is on oil and gas, industrials, software, internet, digital media and healthcare companies located nationwide, as well as companies based in the Southeast across a variety of industries. Founders’ skilled professionals, proven expertise and process-based solutions help companies access growth capital, make acquisitions, and/or prepare for and execute liquidity events to achieve specific financial goals. In order to assist Founders Investment Banking with securities related transactions certain Principals are registered investment banking agents of M&A Securities Group, Inc., member FINRA/SiPC. M&A Securities Group and Founders are not affiliated entities. For more information, visit