A private company recapitalization, in its simplest form, involves a company borrowing money and using the proceeds to purchase some of the owner’s equity ownership. However, a more common form of recapitalization typically involves a partial sale of the existing owner’s equity ownership to a financial sponsor/ private equity investor. This partial sale enables business owners to achieve their financial objectives while maintaining operating control and a meaningful ongoing equity ownership.

Shareholder Liquidity – At closing, business owners can obtain liquidity by selling a portion of their equity ownership to a financial sponsor/private equity investor. This enables business owners a means of achieving partial liquidity, diversification of personal net worth, and a desired lifestyle by unlocking a portion of the value in their business. Additionally, a business recapitalization is an effective tool for addressing ownership transitions and estate planning issues, serving to restructure the shareholder base or buying out certain shareholders who are seeking liquidity.

Access to Growth Capital – The core objective of a financial sponsor is to generate an attractive return on their investment over a certain period of time. In most cases, the company’s ability to generate the return expectations held by the financial sponsors is tied to the company’s growth prospects, both organically and through acquisitions. A recapitalization allows business owners to obtain partial liquidity and gain access to growth capital to achieve a broad set of business objectives. In addition to providing the capital for liquidity and future growth, the financial sponsor can bring considerable expertise in the form of strategic and financial guidance, operational support, and M&A assistance.

Ongoing Equity Ownership Position – Financial sponsors are money managers and are not business operators. Thus, even if a company completes a recapitalization, which results in a financial sponsor obtaining majority ownership, the current business owner/management group generally retains operating control. In addition, financial sponsors will typically put an option plan in place as a way to incentivize management to create value.

Participation in Future Upside – Financial sponsors typically seek to generate liquidity from their investment through an outright sale, initial public offering or future recapitalization within a certain period of time. This provides business owners with an opportunity to achieve additional liquidity. The owner’s remaining equity can ultimately be worth more than the amount sold in the original recapitalization.

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