Business owners in the lower middle-market often elect to pursue a minority recapitalization to achieve some liquidity and diversify their wealth while still maintaining control of their company. By taking on an investment partner, the owner can “take some chips off the table,” and partner with a strategic partner, be it a previous competitor, a private equity firm or another industry-focused investor. This partner/investor will most often have a board seat, but not control of the business.
This approach also facilitates professionalizing the organization and getting it ready for a secondary exit by adding the expertise of the investment partner, while simultaneously bringing in additional capital to support growth initiatives, such as acquisitions, without sacrificing majority ownership.
Note that whether your opt to recapitalized your company, or to sell entirely, the acquirer/investor will likely use a mixture of debt and equity to finance the transaction. If you are selling outright, this likely won’t matter to you. However, if you are bringing on an investment partner in a recapitalization, you may have a bias towards one or the other form of financing.
Companies with adjusted EBITDA exceeding $3 million are particularly well-suited for minority recapitalizations. While minority recaps can occasionally be exeuted for companies under this threshold, it is uncommon as the business needs to be large enough to move the needle for investment groups and for them to allocate several million dollars into. Because of this, $3m is typically the cutoff.
Majority and minority recaps are especially common within fragmented industries that are ripe for private equity groups to consolidate. In this scenario, the owner can secure an investment partner to allow them to diversify their wealth, professionalize operations, and fuel growth initiatives. The strategic transaction can not just allow the owners to get some liquidity, it brings operational expertise to the company.
Not sure if you’re ready to sell majority or minority. Depending on the size of your business, both may be an option.
