Over the years I have often heard business owners say they are interested in selling their business eventually, but want to wait 3-5 years when things are in better shape. In their mind today’s valuation won’t give them enough credit for all this theoretical growth that might occur in those future years. Implied in this decision is that their business has upside and they want to capture it.
This is a logical position, but delaying a transaction overlooks a few important factors. What if the growth never materializes and the business is still in the same spot in 3-5 years? What if macroeconomic factors such as COVID, wars, inflation, interest rates, etc. delay whether a transaction can occur at all?
Now, what if you could transact today to achieve significant liquidity, and still get benefit for that upside? This describes the benefits of completing a partial sale and rollover, often times known as a recapitalization ("recap") with a private equity partner.
In a recapitalization transaction, a business owner takes on a financial partner and sells a minority or even majority position in his/her company, yet still retains a significant equity portion going forward. The business owner still gets the benefit of a liquidity event today, can continue operating their business as usual, and has an option on another liquidity event in the future. Many times a recap can help an owner remove personal guarantees, sleep better at night, and help achieve estate planning goals, while also gaining access to a new partner with deep pockets to help grow the business even further.
Further, by partnering with a hands-on private equity partner such as Minnehaha Equity to complete a recap, the business owner can start to work through the blemishes and issues to make their company more "sale ready" for the future. Initiatives such as succession planning, financial system and control upgrades, acquisition pipeline, geographic expansion, build out a marketing presence, or whatever the case might be. Sometimes these take multiple years to complete, but leaning on your PE partner to help can ensure they get accomplished.
A valuation is still established through a recapitalization transaction to be sure, but the business owner would be less sensitive to getting bottom dollar knowing that there will be future payouts. With a sizable rollover equity position, the business owner is in position to receive a significant "second bite at the apple", as they say. That bite can be amplified even further if the private equity partner awards stock options or earnout payments for a successful investment, allowing the owner to recoup even more equity ownership.
Having a hands-on PE partner likely allowed the company to tackle the business-building initiatives that were necessary to get to that next level the business, and create into a more sale-ready transaction. Plus, the PE partner can often leverage their network to choose the best investment banker to run the next sale process based on industry, size, location, etc. to reach either strategic buyers or the larger PE firms.
The theoretical strategic buyer that can offer a big multiple are notoriously flighty, but nothing related to a recap and business-building will deter them from wanting to get involved. If anything, you have solved integration problems and made your business seem more desirable.
So how can you find a private equity partner willing to complete a recapitalization? You might still consider hiring an investment banker to approach 20-30 or more parties, ranging from independent sponsors to mezzanine firms to traditional funds. Or, reach out directly to companies like Minnehaha Equity who are experienced investors to have direct conversations. The outcome of a recap discussion is that instead of this being a one-and-done transaction at the bottom dollar, find the party with experience and capital to solve your problems and help maximize your company's future growth. Frame the conversation as wanting to take on a partner, and it becomes more about collaboration and growth than a pure negotiation.
A business owner may fear the loss of autonomy in taking on a partner in a recapitalization transaction. This is undoubtedly true when you partner with someone. However, the benefits of certain liquidity today might overshadow this concern. Further, during the management meeting process you can interview your prospective partners to assess how they might be to work with, and can even ask for and check their references, to better understand their partnership style and how they work with their company leaders.
The transaction can be completed, business owner monetizes a portion of his/her years of work, a growth-minded partner with capital is added, and everyone is aligned for an even more sizable event in 3-5 years. It's a win-win.