If you’re on seller side, you might still want a hand in your business’s long-term growth strategies, but not run the day-to-day operations. That’s why many mid-sized businesses are opting to sell a stake in their company to infuse it with new cash and leadership, so it can grow even faster.
This is called recapitalization, and it’s a tactic that businesses are increasingly relying on as they plan the next steps for their companies.
What is Recapitalization?
Recapitalization is a way to sell your business as a funding option that moves the exposures and risks of business ownership to a partner, sometimes another company or an outside investor or private equity group.
It’s a popular option, especially for businesses worth between $5 million and $50 million, according to the International Business Brokers Association.
Selling 51% of your company can bring big rewards for businesses. With recapitalization as the strategy to sell part of your business, business owners can:
- Minimize their business risks and liabilities
- Acquire new capital through a cash pay out
- Gain strategic professional advice from a new source with a fresh set of eyes—their new partner (s)
- Set themselves up for a solid exit five or 10 years later
- Turn over day-to-day operations to somebody else, so they can focus on building the business in other areas
- Infuse additional financial assets into the business
- Expand into new geographic areas or product categories that their partners are familiar with
Is recapitalization / selling shares of your company right for you?
The answer depends on your goals and priorities. Private equity firms or larger companies, schooled at managing their investments and operations, can streamline business operations, ensuring they are run efficiently and are steered toward growth.
Businesses who sell their company may be able to make even more money when the company is ultimately sold years later. They’ll earn cash when they recapitalize and even more years later when they, along with their partners, sell the entire business. By then, thanks to the efficient management of the company by their partners, the business may be worth much more than when they originally sold their majority stake.
Investors are less keen to pour money into a company they don’t control. They’ll want to be able to make key decisions about a variety of issues, including management, leadership and the company’s ultimate direction.
At the same time, private equity firms and buyers of a business often prefer to partner with business owners who have their sights set on long-term success, not a plan to pull out in two years or less.
How can you maintain control when you give up majority stake in your company?
Just because you sell 51% of your company doesn’t mean that you give up every opportunity to control the business that you’ve nurtured from the ground up. That’s where the Shareholders Agreement, Buy-Sell Agreement, and Asset Purchase Agreement comes in when you’re selling your business entirely or selling shares in your business.
A lawyer well-versed in mergers, acquisitions and recapitalization can craft contracts that keep you in the game when it comes to running your business. With a recapitalization, for example, contracts can include language that would return a majority stake to the owner once the purchaser of the business has earned back their capital contribution. Contracts also can spell out other terms that allow for a company’s original owner to buy back part of the business they created and sold to an investor.
The exact terms of a buy-sell agreement or purchase and sale agreement will vary depending on the business and goals of the parties involved in the recapitalization and business purchase acquisition. That’s why it’s always best to take advantage of the expert advice of a legal team who guide companies through similar processes or selling or buying a business. They can help you make the best decision for your business now—and for your own legacy years from now.