We're Known By The Work We Do.
| Print | Follow us
| Join our email list

Private Equity Recapitalization: How it Works

Owners of privately held businesses typically have a large portion of their personal net worth tied up in the companies they have worked hard to build. When considering liquidity and wealth diversification options, however, business owners often ask themselves an over-simplified question: “Should I sell or not sell?” The answer to this question does not have to be an absolute “yes” or “no” response.

Owners of privately held businesses typically have a large portion of their personal net worth tied up in the companies they have worked hard to build. When considering liquidity and wealth diversification options, however, business owners often ask themselves an over-simplified question: “Should I sell or not sell?” The answer to this question does not have to an absolute “yes” or “no” response. By considering a private equity recapitalization, a vast menu of sale and liquidity options become available depending on the business owner’s age, desire to remain involved with the business, vision for the business, and liquidity requirements. Simply put, a partial sale of the business to a private equity buyer (a recapitalization) can accomplish many of the business owner’s stated objectives without selling 100% – achieving some liquidity today, providing a path to additional liquidity on a future sale, and securing a deep-pocketed partner that is committed to growing the business.  Equity recapitalization transactions enable our clients to largely cash out of their investment in the business and capitalize on the enormous amount of sweat equity they have put into their business over the years.

An equity recapitalization represents an alternative to a complete sale of a company. The original owner can continue as a partner and/or manager of the company, while the new partner is a private equity firm that shares the business owner’s culture and vision for the future. Unlike some strategic acquirers who purchase with a view towards eliminating overhead redundancies, private equity firms prefer a more passive or board level involvement and a collaborative relationship with the existing owner and management. As partners, these private equity firms are able to bring strategic opportunities to the company that were not previously available, and can provide strategic management experience in order to assist the company to its next level of growth.

Today, in the United States, there are over 2,000 private equity groups with committed funds. These groups distinguish themselves in a variety of ways, but they all share the common goal of investing in and growing privately held companies. Most private equity groups have clearly defined characteristics they are seeking in businesses: size (revenue and/or EBITDA), industry, geography, and owner/shareholder objectives, among others. Matrix maintains close relationships with hundreds of these groups and has extensive experience in identifying the appropriate private equity buyers to include in an equity recapitalization process, depending on the business owner’s transaction goals.

v-1recap-chart-1

Consider the following example of an equity recapitalization to a private equity buyer:

graphic-Private-Equity-Recapitalization-02

Notes & Assumptions

  • The company is recapitalized at a valuation of 6.5x EBITDA.
  • Company debt of $4.0 million is retired by the selling shareholder, resulting in net proceeds of $28.5 million.
  • Any excess cash or other excess liquid assets would be retained by shareholders.
  • Current owners “roll-over” $5.0 million tax deferred and retain 36% of the equity – results in $23.5 million net cash to shareholders.
  • Sellers pay transaction expenses and taxes out of net cash proceeds.

graphic-Private-Equity-Recapitalization-02

Notes & Assumptions

  • A senior debt facility equivalent to 2.50x EBITDA is arranged.
  • Mezzanine debt of 1.25x is arranged.
  • Private equity group invests cash of $8.75 million for 64% of the equity.
  • Current owners “roll-over” $5.0 million tax deferred and retain 36% of the equity.

graphic-Private-Equity-Recapitalization-02

Notes & Assumptions

  • Management (previously non-owners) is provided with stock options for up to 10%.

 Net Result: Shareholders are able to extract 82% of the equity value of the company in cash while still retaining 36% ownership (versus 18%).

As this scenario illustrates, a business owner can elect to re-invest some proceeds from the sale back into the business (typically on a tax deferred basis) and maintain a significant ownership stake alongside a new private equity partner. While this outcome in very different than an outright sale to a strategic buyer, it allows a business owner to keep some “skin in the game” and realize significantly more upside when a future sale occurs (generally 3-5 years later).

The following table summarizes some of the primary differences a business owner can anticipate between an outright sale versus a private equity recapitalization.

                                            Recapitalization vs Complete Sale

v-2recap-chart-1

Private equity recapitalizations may not be the preferred transaction for every business owner, but they do offer a number of compelling considerations to be discussed prior to starting a formal sale process.

To summarize, private equity buyers provide the following deal characteristics for business owners:

  • Liquidity: Business owners can realize significant personal/family liquidity by selling part of the business and extracting 80% – 90% or more of their company’s current value, while retaining a disproportionate share of the remaining equity.
  • Diversification: Avoids the risks of having personal/family wealth tied to a single business enterprise – allows for prudent diversification of your wealth.
  • Upside: Entrepreneurs can participate in a “second bite of the apple” in 3 to 5 years by maintaining a meaningful ownership stake (30% or more) – by aggressively growing the business, you can create significant additional wealth.
  • Management Continuity: Owners and existing management maintain operational control of the business, and with new partners, focus on accelerated growth. An option program can broaden the equity participation to other tiers of management, who would otherwise never become owners.
  • Partnership: A well-capitalized partner with deep pockets and extensive business connections sets the stage for strong growth internally and/or through acquisitions.

The contents of this publication are presented for informational purposes only. While Matrix Capital Markets Group, Inc. and MCMG Capital Advisors, Inc. (“Matrix”) believe the information presented in this publication is accurate, this publication is provided “AS IS” and without warranty of any kind, either expressed or implied, including, but not limited to, the implied warranty of merchantability, fitness for a particular purpose, or non-infringement. Matrix assumes no responsibility for errors or omissions in this publication or other documents which may be contained in, referenced, or linked to this publication. Any recipient of this publication is expressly responsible to seek out its own professional advice with respect to the information contained herein.

What our Clients Are saying

  • “We were confident from the start that hiring Matrix was the right choice for us.  Matrix’s professionals seamlessly accumulated, organized and disseminated the voluminous amount of data inherent with a transaction of this size.  Their broad knowledge across all aspects of the business helped us to rationalize even the most difficult decisions.  I am extremely pleased with Matrix, the process, and the results.”

    Herb Kaplan, Chairman
    Warren Equities, Inc.
  • “This is certainly a bittersweet moment.  With my family having been in the petroleum business for four generations and me my entire life, it is certainly hard not to look back without some nostalgia.  I am proud to reflect on everything we have been through in this industry, and how rewarding it’s been for me personally and my entire family.  In saying that, this represented an ideal time for our family and where we want to go with our future endeavors.  Matrix did a wonderful job in advising us with such a complicated transaction and was extremely patient while everything was put into place to make it happen.  They couldn’t have been a better partner, and we couldn’t have done it without everyone at Matrix and all of their expertise.”

    Brad Calkins, Owner
    Bradley Petroleum, Inc. and Sav-O-Mat, Inc.
  • “Matrix Capital was able to tap into a wide range of additional resources with M&A International, which proved to be invaluable during the acquisition search process. Matrix Capital and the other European members of M&A International worked very well together and provided a seamless team of advisors throughout the transaction. This facility should successfully service Fleet’s continued international growth plans by allowing us ready and cost-effective access to a variety of currencies in a manner that also allows us to effectively manage risk. Matrix was instrumental in the negotiations and played a vital role in closing the facility in a timely manner.”

    Bob Lemon, CFO
    C.B. Fleet
  • “Matrix has been a great advisor and partner throughout this entire journey. They conducted a thorough financial analysis and handled detailed contract negotiations which resulted in a successful conclusion. Matrix’s knowledge and experience in this area definitely helped us increase the value of our business. I would like to thank God for his blessings and support of all the employees and valued customers who m the business successful.”

    Madhu Shrivastava, Chairman & CEO
    Carolina Convenience Corporation
  • “Matrix, who has previously performed valuation work for the Company, did a splendid job offering a choice of four bank proposals.  RBS Citizens was chosen because of their cash management and industry expertise.”

    Jack Pester, Chairman
    Pester Marketing Company