At some point, every business owner ponders ways to use the firm’s value to expand, improve their personal finances, or as part of an exit strategy to ease into retirement or pass on assets to heirs. A private equity recapitalization can enable you to achieve those things while still keeping a piece of the business and control of it.
A private equity recapitalization (recap) is a tool to help you leverage the value of your business for growth, to restructure debt or fund other ventures. In a private equity recapitalization, a business owner sells a portion of the business, while retaining some equity, to a private group of investors (as opposed to a stock sale taking the business public). This type of recap enables the owners to transform some of their sweat equity into cash and then eventually sell or bequest their remaining share of the firm down the road.
A private recapitalization, properly executed, would allow you to manage and grow your wealth, both inside and outside of the company. For most entrepreneurs, transitioning from a business owner to an investor owning a part of the business can be a big hurdle. However, a recap helps many business founders transition from the “wealth creation” phase of their careers to holding a more diversified portfolio of assets.
Recapitalization Financial And Career Changes
There are many ways a private equity investment could affect your business, your role in it and your financial picture:
- It allows you to retain a stake in your company. Depending on how it is structured, a recap can give owners liquidity as well as allow them to stay in control or gain a supportive partner. After all, the investors like what they see and do not want to change what has been working well. You may want to relinquish some of your day-to-day duties. However, keeping you involved will help keep employees engaged and productive. Additionally, the private equity partner will want your management team to continue growing the company to make their investment worthwhile and so a future sale of their part or the whole thing will net a larger payoff.
- It gives you liquidity to use your money elsewhere. The major reason you would consider a recapitalization is to raise capital. While you may want to use the funds to grow the business to improve the value for an eventual complete sale, you may also want to use the equity you built in the current firm to start a new business, improve your personal financial situation in the event of a divorce or health issue, or ensure you have liquid assets in retirement.
- It gives you diversification in case your company faces a downturn. You constantly hear about the need for a diversified stock portfolio or not putting all your eggs in one basket. However, many business owners are far from diversified. They have much of their personal wealth and nest egg tied up in their company. In addition, they are dependent on firm for their income. That has worked for you so far. However, if there is an economic downturn or your business is hurt by a tariff war, your financial well-being could suddenly be at risk.
- It gives you continued upside via the success of the company. Constraints in working capital and cash flow hamper many companies as they grow or try to move into other markets. Rather than taking out loans, a private equity recapitalization can provide a capital infusion and funding to purchase a new facility, hire and train more staff or revamp computer systems to enable the firm to keep expanding.
- It gives you a way to gift portions of the company to your heirs. A recapitalization allows you to restructure the business. During that restructure, you may want to transfer a portion of the firm’s value to the next generation, which involves issuing nonvoting stock. Transferring that stock with a value frozen for estate and gift tax purposes enables you to “fund” your estate plan and protects them from the increased value you expect to reap from the recap.
- It gives you the possibility to refresh your company’s debt load. Recapitalization can also be used to refinance the company’s debt with cheaper funds. Much like a home refinance that taps into equity, a private equity recapitalization uses the business’s equity to get out from under higher interest rates or eliminate loans.
Help With Your Strategy
Most business owners do not have a clear succession plan and/or exit strategy in place. They have focused much of their attention on building and running the business. You may have visions of your achievement being passed down through the generations, or selling it outright when you retire. However, working with a firm that has experience developing, growing and financing businesses can help crystalize your plans and make them a success.
HJR Global strives to enable firms to develop plans that allow them to be successful. The company works with firms in all phases of development, from startups to those looking for buyouts or recapitalization, in all industries. HJR Global can help you use your sweat equity to grow your small business or fund your future plans. For more information on recaps, please contact us.
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