Matt Gilbert
September 23, 2024
As a business owner in the lower-middle or middle market, you've no doubt poured your heart and soul, time and effort, risk and credit into building your company. But have you given serious thought to your retirement strategy? If not, you're not alone. In fact, statistics show that a staggering 78% of privately-held business owners lack a formal transition plan1. It's like spending years meticulously planning a cross-country road trip, only to realize you forgot to figure out where you're going to park the car and what you will do at the end.
Let's call it like it is most business owners are so focused on day-to-day operations that planning for their eventual retirement falls by the wayside. It's understandable – after all, who has time to think about retirement when there are fires to put out, clients to please, and employees to manage? And when there aren’t those things; your brain is tired, and you need to give it downtime to be ready for the next set of challenges, right? But failing to plan for your departure from the business is like ignoring that bizarre noise your car's been making for months. Eventually, it will catch up with you.
Consider this sobering statistic: only 30% of privately-held businesses survive into the second generation, and a mere 12% make it to the third2; and that’s if you have children or others capable of picking up the torch. It's enough to make you want to put your head in the sand and say you’ll worry about it later. Well, for many of you, later is now! In this issue of GaP Insights, we’ll discuss how you can secure your family's future by easing out of your role without giving up potential upside in your business. Enter the recapitalization event.
Recapitalization is like the business owner’s version of having your cake and eating it too. By selling a controlling interest to a professional buyer, you can cash out a significant portion of your equity while still retaining a stake in the company's future. It's like selling your house but keeping a room for yourself – and that room might just turn into a penthouse suite with an amazing view down the line.
Here's how it works: You sell a majority stake (typically 65-85%) to a private equity firm or financial buyer. This allows you to take a substantial amount of cash off the table and release personal guarantees and other instruments of risk and entanglement. It will also give you the peace of mind of having secured your family's financial future. But unlike a full sale, you retain a minority stake, allowing you to participate in the company's future success.
Now, you might be thinking, "Why would I want to give up control of my baby?" Well, imagine strapping a rocket booster to your company. That's essentially what a professional buyer brings to the table. They come armed with capital, expertise, an appetite for risk, and a network that can propel the business to new heights.
Private equity firms, the good ones in particular, are experts at accelerating growth. They'll help you implement strategies to increase efficiency, modernize technology, expand into new markets, and potentially acquire complementary businesses. It's like giving your company a shot of entrepreneurial steroids and a world class trainer to push it to new heights.
Consider this: private equity-backed companies substantially outperformed their industry peers in capital spending, sales and productivity in the years following their acquisition by private equity investors3. That's not just growth – that's growth on steroids and many owners who are decades into their run are coasting. If they aren’t coasting, they’ve certainly become more conservative and risk averse effectively putting a governor on growth.
One of the beauties of a recapitalization event is that it allows you to gradually phase into retirement. It's like easing into a hot tub rather than diving headfirst into the deep end of a cold pool. You can systematically hand over control to a team you trust, ensuring a smooth transition and preserving your legacy.
This gradual transition has several benefits:
1. Mentorship: You will guide the new management team, sharing your years of wisdom and experience.
2. Cultural Preservation: By staying involved, you can maintain the company culture you've worked so hard to build.
3. Financial Upside: As the company grows and develops new leadership, your retained equity stake is expected to become more valuable.
4. Emotional Adjustment: Let's face it, going away cold turkey from your business can be emotionally jarring. A phased exit allows you to gradually adjust to your new reality.
Of course, this transition has its fulfilling moments. You might find yourself with free time and less stress, wondering what normal people do all day. Or you might realize that your spouse wasn't joking when they said they married you for better or worse, but not for lunch every single day! Humor aside, a well-planned recapitalization can be a game-changer for business owners. It's like finding a hidden fishing spot only the locals know about – suddenly, you’ve got access to a whole new world of possibilities that were previously out of reach or completely off your radar.
As you contemplate your retirement strategy, it's important to understand that realistic preparation is key. Start by aligning with a Transaction Advisor who can perform a Fair-Market-Value exercise that is defendable to buyers and lenders. – a great Transaction Advisor is worth their weight in gold (or Bitcoin if that's more your style).
Begin the process early, ideally, 1 to 3 years before you want to exit. This gives you time to optimize your business, build the next management team, find a great partner, and plan a transition that meets your goals and objectives.
As most of you know, recapitalization isn't just about the money it's also about securing your legacy, ensuring your company's continued success, and finally slowing down to experience life beyond the business.
As a business owner, you've spent years building something remarkable. A well-planned recapitalization allows you to reap the rewards of your dedicated work while setting your company up for future success. It's not just an exit strategy – it's a launchpad for your company's next phase of growth and into your personal next chapter. Are you ready to strap on that rocket booster and blast off into your golden years? With a recapitalization event, the sky's the limit – both for your business and for your personal retirement plans.
You can get started by filling out our quick M&A Questionnaire or give us a call to discuss how Gilbert & Pardue's proven methodology of designing a great phase-out process can benefit you; and while we do it, we can perform an unbiased, defendable Fair-Market-Valuation as a first step toward the future for your business.
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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-$100 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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