Recapitalizations: Limit the Downside, While Maintaining Upside

By Vaughn McCrary

equityEntrepreneurs achieve a great feat when they get past the start-up and early stage phase.  No more sleepless nights…not so fast.  Lower middle market companies often face a new set of risks, including;

  • More Competition: Success brings new competition, whether it be paving the way for new entrants or getting on the radar of more formidable competitors.
  • Outgrowing Resources: Maintaining growth requires more resources. The three F’s (founders, family and friends) and angel investors can get a business started, but maintaining growth for a larger company often requires a bigger checkbook and new expertise.
  • Wealth Concentration: Most lower middle-market business owners have a significant portion of their personal wealth tied up in the equity value of their company.

Hello new sleepless night material.

So why not sell?  Well, while the challenges and risks are evident, the future prospects may look quite favorable.  Who wants to work that hard only to miss out on the real upside?  Business owners in this position might consider an equity recapitalization.

Recapitalizations can come in a few different forms and fashions, and selecting the right one is highly dependent on your situation.  In any case the idea is to take chips off the table (realize some liquidity), while not forfeiting the upside (and actually seeking to make it more likely). For instance, if your company is experiencing high growth, and you need a partner to help you manage that growth with additional capital and expertise, an equity recapitalization might be a good option.

In the following example, the business is growing rapidly and the owner wants to realize significant liquidity, while at the same time gaining a partner to help navigate the high growth. In this case, the owner can achieve all of these objectives and still maintain the ability to participate in any future upside. It is not unusual for business owners to realize as much or more liquidity in a second transaction.

Recapitalization example 1

Debt recapitalizations are also an option when only looking for liquidity, however, only non-recourse debt allows a business owner to realize liquidity while lowering personal risk.  This may be possible for companies with significant tangible assets.  In this example the business has no debt and the owner wants to retain 100% ownership of the company, but wants to realize some liquidity. This option will allow the owner to achieve all of the above objectives. The math looks something like this:

Recapitalization example 2

These are just a couple examples of the many options a business owner has in the form of recapitalizations. We recommend consulting an M&A advisor when deciding whether a recapitalization is a good option for your business.

About Founders Investment Banking

Founders Investment Banking (Founders) is a merger, acquisition & strategic advisory firm serving middle-market companies. Founders’ focus is on oil and gas, SaaS/software, industrials, 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