What is Majority Recapitalisation?
Majority recapitalisation is a financial restructuring strategy where an existing business owner sells a majority stake in their company to an outside investor, typically a private equity firm. This allows the owner to cash out a significant portion of their equity while still retaining a minority ownership position and often, operational control. The strategy is particularly popular among lower middle market businesses looking to infuse capital for growth without entirely exiting the business.
“A majority recapitalization (majority recap) allows you to sell a portion of your business to a private equity group (PEG) while still owning a minority of it. PEG’s may offer to do a majority recap if they want to invest in your business while valuing your expertise, leadership, or strategic vision.”
— Jonah Pollone
Why Choose Majority Recapitalization?
Liquidity
One of the most compelling reasons for a majority recapitalization is liquidity. Business owners can convert a large part of their illiquid equity into cash, providing financial security and diversification.
Growth Capital
By partnering with a financial investor, businesses can gain the necessary capital to accelerate growth, fund acquisitions, or invest in new technologies.
“After the majority recap, you will help operate and grow the business while maintaining your minority share – usually 10-30% of the business. Private equity groups will usually plan to sell the entire business 3-7 years after acquiring the majority stake in your company.”
— Jonah Pollone
Risk Mitigation
Selling a majority stake can also help in spreading the business risk. The new majority owner typically brings in expertise and resources that can help navigate market uncertainties.
How Does It Work?
Valuation
The first step in a majority recapitalization is to determine the valuation of the business. This is often done by M&A advisors who specialize in lower middle market transactions.
“Since a majority recapitalization is not an outright sale of your business, it can be easy to assume that you do not need a merger and acquisition advisor. However, an M&A advisor offers many advantages: They’ll perform a valuation of the business to make sure you’re not leaving money on the table.”
— Jonah Pollone
Due Diligence
Once a valuation is agreed upon, the potential investor will conduct due diligence to verify the company’s financials, operations, and compliance.
Deal Structuring
The terms of the deal, including the percentage of ownership to be sold and any governance changes, are then negotiated and documented in a definitive agreement.
Closing and Beyond
After all conditions are met and approvals are obtained, the deal is closed. Post-closing, the business owner and the new majority owner work together to execute the growth strategies.
Is Majority Recapitalization Right for You?
“Any business can perform a majority recapitalization, regardless of size. However, it is most common for larger companies to do a majority recap. Most private equity groups invest in companies with a minimum of $500,000 to $1,000,000 in EBITDA.”
— Jonah Pollone
Conclusion
Majority recapitalization offers a unique opportunity for business owners to achieve liquidity, while still participating in the future growth of the company. It’s a complex process that requires careful planning, expert advice, and strategic execution.
By understanding the intricacies involved, you can make an informed decision that aligns with both your personal and business goals. Always consult with M&A advisors who specialize in your market segment to navigate this complex process successfully.
By providing this comprehensive guide on majority recapitalization, we aim to equip business owners with the knowledge and insights needed to make informed decisions. The strategy can be a win-win for both the business owner and the investor, offering financial gains and operational advantages.
