A minority recapitalization, also known as a “minority buyout”, is a viable solution for business owners who need to achieve liquidity but do not want to sell their company outright. Often used to complement and extend the liquidity from existing capital sources – such as cash-on-hand, traditional bank loans or senior debt – a minority recapitalization can be funded through a combination of mezzanine or subordinated debt and/or preferred equity. As such, a recapitalization can be structured in a variety of ways to support a company’s growth objectives or help shareholders achieve their liquidity goals without giving up majority control to outside investors. Why might you want to complete a minority recapitalization for your business?
- To provide liquidity for a shareholder who wants to achieve partial or full liquidity
- To consolidate shareholder ownership
- To transition ownership to a subsequent generation, managers or to employee stock ownership plans (ESOP)
- To finance a growth event, such as an acquisition or expansion
Here are the top 10 benefits of a minority recapitalization:
- You do not need to rely on existing financing sources—A minority recapitalization broadens your financing options and will provide more capital than simply relying on existing cash/liquidity and senior debt capacity.
- It is customizable—The reasons a shareholder or business might need additional liquidity are as varied as the owners and businesses themselves. A minority recapitalization can be tailored to fit unique requirements and to meet a range of liquidity objectives.
- Keep both hands on the wheel—Because liquidity does not come at the price of majority ownership, funding for shareholder consolidation or capital spending does not come at the expense of operational or cultural control.
- Fund future growth—Growth, achieved organically or through acquisitions, requires capital; and fast growing companies can often outpace their ability to borrow through their usual channels. A minority recapitalization can help extend a company’s borrowing ability for sustained growth.
- Less expensive than issuing common equity—The junior capital used to finance a minority recapitalization sits between senior debt and common equity in the form of mezzanine or subordinated debt and/or preferred equity, and can provide a less dilutive, more cost effective and tax efficient structure, as opposed to issuing new common equity.
- Participate more fully—Remaining, active shareholders can consolidate and maximize their ownership as well as benefit from future value created by the business down the road.
- Second bite at the apple—Owners looking to diversify their personal net worth can achieve partial liquidity today, while allowing the remaining equity value to grow prior to a future liquidity event or sale.
- Facilitate the transition—When owners decide to step back from the business to transition to a new generation, management or ESOP, a prudent and patient capital structure that works for a diverse set of interests is required. A well-structured recapitalization can enable a smoother handover.
- Prelude to outright sale—Liquidity can be used to better position a company for an outright sale in the future—financing current growth initiatives or in some cases to pay down older, higher cost debt.
- Gain a long-term partner—Typically, minority recapitalizations are facilitated by buy-and-hold investors who are able to partner with a company for the long term.
A well-structured minority recapitalization can provide the much-needed infusion of capital where and when companies need it most. Finding the right capital provider who understands your liquidity objectives and can tailor the right structure for you takes time and research. When working with a partner like Prudential Private Capital, business owners receive a more streamlined due diligence and execution process, with fewer parties involved and no finance contingencies. In turn, owners can receive the liquidity they need in short order. We at Prudential Private Capital are about relationships, not transactions, and would welcome the opportunity to talk to you about how we can help you reach your capital goals.