Recapitalizations

Overview

Do you have a partner that has either retired or ceased being an asset to your company?

Would you like to figure out a way to transfer ownership of your business to your employees and / or children?

Would you like to pull some equity out of your company so that you can diversify your investments?

Opportunity

Often, after many years of being in business together, the owners of a business grow apart and either want different things out of life or want to take the business in mutually exclusive directions.  Rather than viewing a sale of the business as the only option, it is possible to buy out a partner with a recapitalization.

As the founder of a business nears retirement, he or she starts to focus on their retirement nest egg and what their options are with respect to their business.  Rather than viewing a sale of the business as the only option, it is possible to adopt a plan to transfer ownership of the business to its employees or to the heirs of the founder with a recapitalization.      

Often, companies that have been in business for a long time represent a large amount of illiquid equity for their owners.  It is possible to withdraw a portion of such equity without selling the business.

Solution

It is frequently possible for a company to borrow from senior and mezzanine lenders to accomplish the objectives described above.  Typically, an established company will have unencumbered assets and excess free cash flow.  Such assets and cash flow can be used to provide collateral and debt service coverage to lenders. 

Loans from the sellers of equity in the business are also an efficient way to accomplish a recapitalization.  Seller financing is typically the cheapest form of financing available.  Particularly when such financing is fully subordinated to the company’s other lenders.

Avoiding Common Pitfalls

 Often partners in a business are too informal when it comes to a planned recapitalization.  It is just as important to have all of the business issues resolved in a written Letter of Intent with your partner as it is with an outside third party.  Too often a lot of work and money is put into a transaction only to find that there was not really an understanding between the partners.    

It is frequently difficult for a founder of a company to delegate the operations of “his” or “her” company to others.  In a recapitalization where succession planning for the business is also involved, it is important to make sure the post recapitalization owners are in a position, both legally and practically, to be able to operate the company.