Is Majority Recapitalization Right for You?

Is Majority Recapitalization Right for You?

Marjory Loebe

April 19, 2024

As M&A advisors representing privately held business owners, we are very familiar with the intricate process of navigating the various change of control options available. When guiding business owners in the later stages of their careers, achieving their slow-down and eventual exit goals is an important part of the sale process. Among the many paths available, one option that merits careful consideration is majority recapitalization. At GaP, we have had the privilege of representing numerous middle-market business owners who have opted for this type of change of control, resulting in great satisfaction. While this route may not be suitable for every business owner, its benefits and advantages should be considered for those interested in continuing to work within the business after the sale.

1) Shareholder Role:

One fundamental and often welcome aspect to consider is the seller's transition from a controlling shareholder position to a minority shareholder role. This shift can mark a significant turning point, allowing owners to relinquish certain responsibilities and burdens that may have become cumbersome over time. By transitioning to a minority shareholder position, owners can focus their attention and energies on the aspects of the business they are most passionate about, while potentially shedding duties that no longer align with their interests or strengths.

2) Rewarding Key Employees:

A compelling aspect of pursuing a recapitalization event is the opportunity to reward key employees. In many privately held businesses, key personnel play a pivotal role in driving success and maintaining operational efficiency. Through recapitalization, owners can structure deals that incentivize and reward these valuable team members, fostering a sense of loyalty and commitment that can be instrumental in ensuring a smooth transition and sustaining the business's momentum post-sale.

3) Renewed lease Agreements:

For owners who also hold ownership of the business facilities, a recapitalization event can present the opportunity for a renewed lease agreement with the new entity. This aspect holds particular significance, as it provides owners with the assurance of continued access to essential assets while alleviating concerns about potential disruptions or relocations. A favorable lease agreement with a vested party can contribute to the overall stability and continuity of operations, thereby enhancing the attractiveness of the business to potential investors or acquirers.

4) Personal Guarantees:

Recapitalization events offer the prospect of unwinding personal guarantees and other uncomfortable arrangements the owner may have been required to endure. Many business owners find themselves entangled in various financial obligations and commitments, which can pose risks and constraints on their personal and professional endeavors. Through strategic negotiation and structuring, recapitalization transactions can facilitate the release of these burdens, providing owners with greater peace of mind and financial flexibility as they embark on new chapters in their lives.

5) Defense of Growth:

Central to the success of any recapitalization strategy is the clear outlining and statistical defense of a growth trajectory. Investors and acquirers are inherently drawn to businesses with promising prospects for expansion and profitability. As such, a seller’s transaction advisor must meticulously articulate a vision for the business's future and provide compelling evidence to support growth projections. This entails a comprehensive analysis of market dynamics, competitive positioning, operational efficiencies, and potential avenues for expansion or diversification. By demonstrating a compelling growth trajectory, sellers can instill confidence in investors and maximize the value of their business.

Recapitalization of a business with strong, energetic, well-connected partners is a viable and potentially lucrative strategy for privately held business owners to examine. By aligning with professional and proven transaction advisors, business owners achieve their exit goals in the sales process while unlocking value and opportunities for themselves and their stakeholders. From transitioning to a minority shareholder position to rewarding key employees and renegotiating agreements, recapitalization events offer a range of benefits that can enhance the overall outcome of a change of control. As owners weigh their options, careful consideration of recapitalization options could prove to be a prudent and rewarding decision. However, success hinges on many variables that are determined in strategic negotiations. Maximizing value and minimizing risk makes it incumbent upon an owner to seek the professional advice of a trusted M&A advisor when considering the many benefits recapitalization events offer.

If any of this resonates with you, we encourage you to complete our M&A Discovery Questionnaire and talk with us to see if your business makes the cut as one who can still command a great exit in this M&A environment. We will be in touch quickly to discuss the results. Click here to take the assessment.

Gilbert & Pardue Transaction Advisors (GaP) is a Houston-based business advisory firm serving lower middle and middle market business owners from coast to coast through representation for Mergers & Acquisitions (Matt Gilbert and Bret Pardue established GaP to provide owners of privately-held businesses – those businesses generally enjoying annual revenue of $10-$80 million – with the quality of M&A representation and value-enhancement services previously only available to upper middle and large businesses. GaP brings highly experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and middle market provides the quality of representation and transactional expertise that we do.

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