3 Reasons Why Business Owners Should Be Open To Majority Recapitalizations

We see it again and again. Private equity investors choosing to bring down their risk and increase valuation by keeping owners engaged for some period of time after the deal closes. If an owner is going to stay around post-closing, then it follows that they would want to keep some equity as well. In today’s marketplace, understanding the basics of majority recapitalization is critical.

What is a majority recapitalization?

Recapitalization is the process of restructuring a company’s debt and equity mixture, often to make a company’s capital structure more stable, to provide the owner with an exit strategy, or to support a growth strategy. When a business owner sells over fifty percent of their business, but still maintains ownership in the company, it is called a majority recapitalization. 

Buyers often benefit from these strategies for several reasons, the most popular being preserving the company culture. The longer a buyer can keep the original business owners involved, the greater the probability they can retain key talent, preserve competitive advantages, and maintain employee engagement. 

Here are three reasons why business owners should seriously consider a majority recapitalization as part of their exit strategy:

1. The owner keeps a piece of the pie
By maintaining a stake in the company, the original owners can still reap the benefits of the company they created. They aren’t handing over their baby and walking away – but rather they stay involved for a period of time, both with the business and their industry.

2. The owner gains flexibility and liquidity
A major reason owners enter into a majority recapitalization is to gain liquidity. The current owner(s) may see a growth opportunity for the company, which requires a financial partner that can provide cash. In exchange for the capital, the owners are willing to sell a portion of the company. Other uses for the capital include starting an entirely new business, or investing in stocks, business, or other assets to diversify the sellers’ finances.

3. The owner keeps options open for the future
Not every business owner is ready to retire or has a ready plan for their next venture. However, they may be willing to relinquish some of their day-to-day management duties as they figure out next steps. A majority recapitalization allows owners to remain involved and own a portion of the business while lessening their overall day-to-day responsibilities.

A majority recapitalization is a great way for business owners to get the capital they need, without relinquishing total control of their business. Investors can breathe new life into the business and bring new ideas that can contribute to future growth. The keys to a successful deal are clear communication, clearly defined objectives, and a clear vision for what post-deal operations will look like. 

Symmetrical assists Middle Market companies strategically assess their needs and identify opportunities. Contact us for a confidential discussion about how we can help.