Private equity funds offer a way to get a capital infusion for your company for a period of time while maintaining a role in its operation and avoiding a sale or a merger.
It's called equity recapitalization, and it typically involves selling a minority or majority stake in your company to a private equity fund.
With an equity recap, you retain part-ownership and remain involved in the daily operations of the company for an average of five years. Following that period of restructuring and growth, the equity fund typically sells its ownership stake. Then, a second deal is arranged with the equity firm that may involve the owner:
Many candidates for equity recap are private business owners looking for personal liquidity or financing to expand their companies. But shareholder regulations may limit a corporate owner's ability to liquidate — or sell — a large portion of personal shares, which keeps the majority of the owner's personal wealth tied up in the company.
With an equity recap, however, the owner is freed up to sell a large stake in the company. An equity recap can offer multiple advantages, including:
Despite the advantages, however, if you consider an equity recap restructuring, you should proceed carefully with professional help both during the initial share transfer and the subsequent resale. There are two pitfalls in particular that you want to clarify, both regarding ownership:
One of the most important steps when considering an equity recap is to seek expert guidance in the following areas:
Bottom line: An equity recap is a complex transaction that takes several months to complete and also has an interim period of several years. Yet many business owners have found it a preferable path to selling their companies outright or merging with other corporate entities.
Another important element of an equity recap is to find a partner who shares your vision for the company because the private equity fund will play a key role in future growth.
It is also vital to consider how well the personalities will mesh on both sides in the years to come. The current management of the company must feel comfortable interacting on a regular basis with the private equity fund as it will be a partnership going forward regardless of whether a majority interest in the company is relinquished or not.
Typically, companies hire an intermediary such as an investment banking firm to establish a value for the company, help position the company with the appropriate funds, and ensure confidentiality of the process so as not to alarm customers, employees or competitors.
Choose a trusted intermediary you enjoy working with and who has:
Once the private equity firm is selected and a value for the company is determined, due diligence is performed, purchase documents are negotiated and a closing date is set. The typical process generally takes four to six months to complete.
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