Is an EQUITY RECAP right for MY Company?

4 Nov

By:  Huxley Nixon

You frequently hear that Strategic Buyers always pay MORE than Financial Buyers but this is NOT the case if an Equity Recap is right for you and your company.  For business owners considering a sale of part or all of their company in the next decade but are not ready to retire or give up operational control today you will want to read further.  This structure allows owners to ease into their eventual exit by doing it in two steps over five to seven years. It also allows them to sleep better now by knowing they have converted a significant amount of their illiquid stock into cash, potentially eliminate their personal liability by transferring it to their new equity partner and have an opportunity for a second bite of the apple in the future.

What is an  Equity Recapitalization?

Also known as a Leveraged Equity Recapitalization.  It is a financial transaction where existing shareholders exchange 30% to 80% of their equity for cash with an outside financial investor like a Private Equity Group (“PEG”) that “re-capitalize” the balance sheet by infusing new equity and debt.  This structure allows the business owner to convert some their “illiquid” stock into cash today while maintaining a meaningful equity and operational interest in the company and participate in a second sale in five to seven years.


  • Liquidity – allows owner (and equity stakeholders) to diversify personal assets while maintaining a meaningful ownership position.
  • Management Continuity – Usually, new financial partner wants to leverage off of existing management and loyal employees to run the business.
  • Elimination of Personal Liability – When selling a majority equity position to a strong private equity partner it allows the business owner to shift the debt liability to the new equity partner, thus removing any requirement for personal guarantees.
  • Aids in Succession Planning –  helps provide a fair way for accommodating the disparate needs of family shareholders allowing the owner and the new controlling shareholder the opportunity to select the best candidate(s) to remain to lead the future growth.
  • Second Bite – Business owner(s) typically retain a significant equity position in the re-capitalized company and stands to generate a second liquidity event when the company is re-sold.  Depending on performance, this second payday can be larger than the initial transaction.
  • Experienced Growth-Oriented Financial Partner – brings access to financial resources and industry experts not available to owner.


Bob, 65 years old and the owner of Zenith Distributors (“Zenith”), has spent his career building his value-add Distribution Company to $50 million in sales and EBITDA of $5 million.  Virtually all of his net worth is tied up in Zenith and the additional liability of his personal guarantee securing the company debt of $5 million has made Bob more risk averse.  He knows Zenith has great growth prospects in the next several years but when faced with an additional investment to capture these growth opportunities he is uncomfortable in increasing his personal risk profile.

Alex, CEO of BIG Guy Distributors, a subsidiary of a large public company that distributes products complementary to Zenith’s product line in a different geographic market wants to meet to discuss synergies between their companies.

Succession Issues

Bob meets with Alex and learns that they are interested in acquiring Zenith to increase their geographic reach.  Bob is NOT prepared for this conversation and says Zenith is “Not-For-Sale”.   However, this serendipitous overture forces Bob to think about his inevitable transition out of the business.  There are many important issues regarding a transition – for Bob, family shareholders and employees.

Bob has two children, Kevin and Sally, and both work in the business.  Bob owns 75% of the equity with each of the children owning 12.5%.  Kevin is the oldest but in Bob’s eyes is not capable to run the company. Sally is smart, aggressive, a natural leader and has earned the respect of employees, vendors and customers.  Sally wants to invest more into the business to expand their product line and geographic reach but Bob does not want to take on more risk at this stage in his career.

Bob retains a professional valuation firm to determine what his company is worth before continuing the dialogue with Alex.  This analysis determines his company’s total enterprise value (TEV) is $27.5 million.

Bob’s Dilemma

Bob re-engages with Alex and BIG Guy offers $30 million for Zenith.  It will become part of BIG Guy and post closing the services of Bob, Kevin and Sally will no longer be needed.   Zenith has become Bob’s identity and he does not have any outside interest or hobbies.  Alex’s offer price is $2.5 million higher than expected but Bob has NO idea of what he will do with his time post closing.   Bob decides he must seek advice from someone who has faced these issues so he calls John, a trusted mentor who sold his company five years earlier.

Having Your Cake and Eating It

After hearing Bob’s story and fears, John suggested Zenith is an excellent candidate for a Leveraged Equity Recap.  He suggested several respected private equity firms that target family owned business where the owner is not ready to retire but want to De-Risk their personal financial picture by converting a significant portion of their illiquid stock into cash while retaining operational control and having an opportunity for a second bite-of-the-apple in the future.

Bob put his discussions with Alex on hold and takes John’s advice and contacted several private equity firms he recommended.  Bob “clicked” with the partners and management philosophy at ABC Equity Partners.  They also were very impressed with Sally and want her to remain in top management with Bob post closing.

Bob’s Options


Accept Alex’s seemingly generous offer and sell 100% of Zenith to BIG Guy and retire.  This would provide Bob and his children the following economic benefits but none of the family would be involved with the company post closing and Zenith would be absorbed into BIG Guy’s.

Sale to BIG Guy’s Distributors, Inc.

Pre-TAX (000′s)

SALES PRICE –                      $30,000  (6 X EBITDA)

Less Debt –                              $5,000__

NET Proceeds –                     $25,000

(Cash Split: Bob – $18.75 MM, Kevin & Sally $3.125 MM each)


ABC Equity Partners offers to partner with Bob and Sally to recapitalize Zenith and arrive at a valuation of $27.5 million (5.5 X EBITDA). They want Bob and Sally to continue to lead the company post closing but do not feel Kevin is a fit to help grow the company.  It is determined that the company can comfortably support $17.5 million of debt (3.5 x EBITDA) leaving an Equity requirement of $10 millionABC invests $6 million in equity for 60% of the Re-capitalized Zenith (“NEWCO”) and Bob and Sally invest collectively $4 million for a 40% equity interest and will remain to execute the growth plan created by ABC and Bob’s management team.  Kevin elects to sell 100% of his shares and pursue other interests.

ABC Leverage Equity Recap of Zenith Distributors, Inc.

Pre-TAX (000′s)

Zenith Value –                                $27,500          100%

Less DEBT –                                      $5,000_

Pre-NEWCO Proceeds –              $22,500

(Cash Split: Bob – $16.875 MM, Kevin & Sally – $2.8125 MM each)

NEWCO Capital Structure

New DEBT                                        $17,500           63%


ABC  (60%)        $6,000

Bob    (30%)       $3,000

Sally  (10%)       $1,000             _________

TOTAL EQUITY                          $10,000          37%

TOTAL CAPITAL                        $27,500          100%

(Post NEWCO Cash Split: Bob – $13.875 MM, Kevin – $2.8125 MM, Sally – $1.8125 MM)

Assuming Zenith is SOLD in 5 years and Sales and EBITDA have grown 10% annually at the end of year 5 they will be approximately $82.3 million and $8.2 million respectfully.  A debt balance of approximately $5.4 million remains.  After speaking with multiple interested buyers, Zenith is sold to BIG Guy Distributors for $59 million (7.2 X EBITDA).

Sale of NEWCO 

Pre-TAX (000′s)

SALES PRICE                                   $59,000  (7.2 X EBITDA)

Less Outstanding DEBT                 $5,400__

NET EQUITY                                    $53,640          100%

ABC    (60%)        $32,184

Bob     (30%)        $16,092

Sally    (10%)        $5,364                  ______

TOTAL EQUITY                               $53,640          100%


OPTION A                   OPTION B                                DIFFERENCE______

$25,000       vs          $39,956                      $17,956 (increase of 60%)

(Net PROCEEDS  (000′s) to Family shareholders, pre-tax & before any transaction fees due)

OPTION B – WINNER in a Landslide!

  • At the initial Recap Bob was able to take $13.875 million ($16.875 M – $3 M invested in NEWCO) off the table to do some estate planning and diversify his portfolio + no personal guarantee was required on the company debt + he owned a 30% equity interest in NEWCO resulting in an additional equity payment of $16.09 million upon its sale + he continued to run his company for five more years (which allowed him the time to emotionally prepare for the inevitable separation from it and the employees who were like family).
  • Bob was able to create a fair solution to SUCCESSION issues created by having one child who was not well suited for the business and the other who had proven their leadership and ability to perform.
  • NEWCO benefits from a valuation bump due to the “Size Premium” – NEWCO’s TEV has grown from $27.5 million to $59 million at sale date.  Click here to read more.
  • LASTLY, Bob and his Family received a total pre-tax (and pre transaction fees) payment for their Equity of $39,956,000!  Almost 60% more by NOT selling out at the higher price offered initially by a Strategic Buyer!

Author: Huxley Nixon has been involved in M&A (mergers and acquisitions) for 35 years as a buyer, seller and intermediary.  He is founder of the M&A MARKETPLACE by CHC ( where the buyer pays all success fees and the process is only 120 days.  For owners of private companies considering a sale of part or all of their company – it provides a very quick, confidential and competitive alternative to current options less transparent and more disruptive for the owner.

DISCLAIMER:  The example above is a fictitious transaction and is intended only to illustrate how an equity recap works and demonstrate its potential benefits based on the facts assumed in the analysis.  Opinions and conclusions in this post are solely those of the author unless otherwise indicated.  This article is for general information purposes and is not intended to be and should not be taken as advice on any particular matter nor is it intended to be a solicitation regarding any securities transaction and or investment relationship.  For those desiring additional information please visit our website

One Response to “Is an EQUITY RECAP right for MY Company?”


  1. WHO is the best buyer for MY Company? « - November 7, 2011

    […] now while growing the company to a larger critical mass and take a Second Bite in five years.  Click here to see an example of how this scenario unfolded for Bob and his decision to do an equity […]

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: