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3 Reasons Why Majority Recapitalizations Work

Recapitalizations are the way of the future. It is no longer acceptable for an owner to sell their business one day then turn around and go to the shore the next. Private equity investors and strategists alike can bring down their risk profile and increase valuation by keeping owners engaged for some period of time post-closing. If an owner is going to stay around post-closing, why not keep some equity?

So, what is a recapitalization? Recapitalizations are typically used to fund future growth initiatives, make a company’s structure more stable and/or provide liquidity to business owners. When an owner sells over fifty percent of the business, but still maintains ownership in the company, this is a majority recapitalization.

Here are three reasons why majority recapitalizations make sense for business owners:

1. They keep a piece of the pie
A business owner may not be ready to fully retire. However, they may be willing to relinquish some of their day-to-day management duties where they may not add as much value as in other areas where they really excel. A majority recapitalization allows owners to remain involved and own a portion of the business while lessening their overall responsibilities.

It’s worth mentioning that by keeping original business owners involved, the company culture is less likely to change. Employees who love where they work are more likely to stay engaged and continue contributing to a company’s bottom line.

2. They gain flexibility and liquidity
A major reason owners enter into majority recapitalizations is to gain liquidity. The current owner(s) may see a growth opportunity for the company, which requires a financial partner that can provide cash. In exchange for the capital, the owners are willing to sell a portion of the company.

Other uses for the capital include: starting an entirely new business, or investing in stocks, business, or other assets to diversify the sellers’ finances.

3. They keep options open for the future
By maintaining an ownership stake in the company, original owners can still reap the benefits of the company they are selling a stake in. It’s important to consult with a team of professionals before embarking on a recapitalization. This team typically includes an M&A advisor, attorney, accountant and others.

A majority recapitalization is a great way for business owners to get the capital they need, without relinquishing total control of your business. Investors can breathe new life into the business and bring new ideas that can contribute to future growth. It’s important to choose your investor carefully and pick someone who shares your vision for growth and company culture as you’ll be growing the business together.

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