Private equity (PE) firms face a dilemma: they have too much money sitting on the sidelines, much of which is earmarked to invest in janitorial businesses, yet they can’t find enough quality companies in these sectors to invest in.
At the same time, we are on the verge of what many deem the “Silver Tsunami,” resulting from thousands of baby boomer business owners approaching retirement age and exploring their options for the next phase of life. How is it possible to bring both sides together for mutual gain? The answer is called recapitalization, or recap.
Baby boomers are entering an era where they need to start preparing for life after their business. These business owners struggle with the decision of continuing to grow their business, selling their company to a corporate or strategic buyer, transitioning the company internally, or, in rare cases, liquidating the business.
Ultimately, many business owners just can’t let go, whether they realize it or not. They may not want to give up the lifestyle that business ownership affords; they may still have the energy and passion to continue running their own company; or they feel a sense of obligation to take care of their employees. A recap can pave the way for all of this, allowing an owner to take some chips off the table, fund growth, and maintain a steady organizational structure.
Why Consider a Recap?
Two main reasons to consider a recap are:
- Diversification: Diversify away the risk of having too much personal net worth in a single asset.
- Growth: Fund growth via mergers and acquisitions (M&As), entering new markets, or otherwise, without taking on the risk of personally guaranteeing a loan.
Flexing New Muscles
PE investors can bring different concepts and ideas to grow the business, and they can help recruit a higher level of executive talent. A recap can be the best of both worlds for a business owner. It creates a liquidity event today, enabling an owner to sell a significant ownership stake in their company for cash, de-risking their personal balance sheet. Since most owners have the bulk of their personal net worth tied up in their companies, this creates personal diversification.
At the same time, they retain shares in their business. Alongside their PE partner, they will continue to grow the business, likely at a much faster rate than in the past. In the future, they will have the option to sell it again and liquidate their remaining shares for an even greater gain. All the while, the original owner can remain CEO or board chair, ensuring continuity and control over day-to-day operations.
One of the key metrics for PE firms is a well-rounded management team. In addition to talent, they get excited when they see management teams that have skin in the game. A recap typically creates the opportunity for key leadership to buy into the business while also earning additional equity incentives for performance. This allows business owners to take care of their employees without unnecessarily diluting their original stake in the business.
Creating a Stable Future
Baby boomer business owners are searching for answers. As owners struggle with what their best available options are, such as selling to a third party, liquidating, or a management buyout, it would behoove business owners to look at a recapitalization. A recap provides an outlet for owners to take some chips off the table, fund growth, create a stable company for the future, and allow the owner a second bite of the apple.