Managing Partner, Montage Partners.
Many business owners and founders have an eventual goal to sell their company. But not all do, especially those who are younger or earlier in the growth phase of building their company. The idea of completely disengaging from the business one spent years—even decades—building just isn’t appealing for those with an enduring entrepreneurial spirit, even with the sale proceeds from an exit in mind. Many fear having “nothing” left after a sale, whether emotionally or in terms of how they will fill their days post-transaction.
These concerns can be mitigated with a specific type of sale: private equity recapitalization. I am a Managing Partner at a private equity firm that regularly invests in founder-owned businesses via recapitalizations. Here are some ways this transaction can be a great fit for many founders, as well as some considerations when choosing a private equity partner.
Liquidity
The first and most obvious benefit is that a recapitalization provides partial but meaningful liquidity to business owners. For business owners who have most of their personal capital tied up in their company, this can help diversify their assets and protect the wealth they’ve spent years building.
At the same time, because they are not selling 100% of the company in a recapitalization, they retain a stake in their life’s work. The amount of this stake can vary according to their preferences and that of their PE partner. However, many business owners like that a portion of their equity is still invested in a company they love and know better than anyone else.
Control Over Your Role
As many business owners know, liquidity isn’t the only consideration when selling and exiting a company. There are the emotional considerations and the very real questions about what they will do with their time post-sale and what will happen to the legacy they’ve spent years building. With a private equity recapitalization, business owners have control over what role they want to play in the company post-transaction. If they’re passionate about leading their company and want to keep going and accelerate growth plans with the help of a PE partner, they can stay in their role.
Suppose you want to take a step back from day-to-day operations, perhaps to enjoy some form of retirement or explore other passions. In this case, you can explore taking a board role and remaining involved as an advisor while continuing to own a portion of the company.
Because of the flexibility here, recapitalizations can be ideal for even younger business owners who simply want access to more capital or other resources that PE partners bring to the table to grow their company. This is a decision a business owners will want to have clarity on before any transaction to ensure that any potential PE partners are aligned on their role going forward.
A Second Exit
There’s also the “second bite of the apple,” which happens when the PE partner eventually exits after the company has achieved its growth objectives. Many business owners, especially those seeking full retirement, choose to fully exit their stake in the company at this point. Sometimes, an owner’s proceeds at this “second exit” can exceed their original proceeds from the PE recapitalization.
A Few Considerations
While the benefits of a recapitalization may sound appealing to many business owners, it’s not always the perfect fit for a potential transaction.
For founders who want to fully monetize their proceeds via an exit today or owners who want to fully retire now, a recap won’t accomplish these objectives. For owners who see a lot of future upside in their company and are confident that their business will be worth much more at a later point, a majority recapitalization, in particular, may not make sense, as these owners likely want to retain a bigger piece of the pie (knowing the pie will be much bigger in the future). In these cases, a minority recapitalization could still be an option.
Choosing A PE Partner
As with all sale or investment transactions, finding the right fit between you and the private equity partner is crucial to enjoying these win-win scenarios. When evaluating potential PE partners, make sure they are aligned with your goals.
Do they seek to acquire 100% of the company while you only want to sell a portion? Is the PE partner comfortable with you remaining as CEO of the company if that’s your desire? Are you on the same page regarding the timeline of the second and final exit?
As you consider selling your company, think through the different options available to you. Work with your potential private equity partner to answer these questions early on in a transaction to ensure you are partnering with the right investor for you and your company.
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