Recapitalization Strategies

Exit Through Recapitalization

Taking some of your chips off the table and continuing to play.

Recapitalization is a common mergers and acquisition approach in which the buyer acquires controlling interest in a company. Some or all of the selling shareholders retain a minority position in the company and typically continue as company employees in the management roles they held prior to the sale. There is frequently a downstream exit path for the remaining minority shareholders negotiated as part of the transaction, whether through a subsequent IPO, merger or sale of the company, or structured buy-out over time according to a predetermined methodology. While not for everyone, when the strategy is appropriate, it can be very satisfying for all concerned.

Buyers Like It
 
There are many investment groups and corporate buyers who like this approach because it:
 
Allows them to invest and build with a proven management team, while they bring their financial, marketing and higher level business capabilities to the venture.
 
Creates equity based performance incentives for selling shareholders and management.
 
Minimizes disruption in the acquired company.

Sellers Like It:
 
Some sellers like this approach because it:
 
Broadens the market for potential buyers.
 
May allow sellers to accomplish a stock sale for significant tax benefit.
 
Provides a clear exit path, while allowing a gradual phase out for the seller under an employment agreement, usually with a base salary and performance bonuses.
 
Offers a chance to convert a large portion of sellers’ equity to cash, while still providing an opportunity for upside potential when they sell off their remaining interest.
 
Brings in needed capital and management strength to enable the company to grow.
 
Gives them more control and input into the future of the company than other earnout or other contingent performance based approaches.
 
May optimize selling price as recapitalizations are usually perceived by the buyers that like the recap structure as less risky than an outright purchase.
 
For additional information on recapitalization strategies, Contact us.