Private equity funds offer a way to get a capital infusion for your Maine-based company for a period of time while maintaining a role in its operation and avoiding a sale or a merger.

It’s called equity recapitalization and it typically involves selling a minority or majority stake in your company to a private equity fund.

With an equity recap, you remain involved in the daily operation, and also retain part-ownership of the company for an average of five years. The equity fund typically sells its ownership stake following that period of restructuring and growth. Then, a second deal is arranged with the equity firm that may involve the owner:

• Selling the remaining stake.
• Retaining the stake.
• Buying back the debt from the equity company and regaining full ownership.

Choosing Partners Wisely   

Another important element of an equity recap is to find a partner who shares your vision for the company because the private equity fund will play a key role in future growth.

It is also extremely important to determine if personalities mesh well, and will do so for years to come. The current management of the company must feel comfortable interacting on a regular basis with the private equity fund as it will be a partnership going forward regardless of whether a majority interest in the company is relinquished or not.

Companies typically hire an intermediary such as an investment banking firm to establish a value for the company, help position the company with the appropriate funds, and ensure confidentiality of the process so as not to alarm customers, employees, or competitors.

Choose a trusted intermediary you enjoy working with and who has:

• Knowledge and experience with equity recaps.
• An understanding of the tax and dilution implications of various debt and equity structures.
• Contacts and understanding of investment goals with the private equity community.

Once the private equity firm is selected and a value for the company is determined, a closing date is set once due diligence has been performed, and purchase documents have been negotiated. The typical process generally takes four to six months to complete.

Equity Recap Candidates

Many candidates for equity recap are private business owners looking for financing to expand their companies, or for personal liquidity. However, shareholder regulations may limit a corporate owner’s ability to liquidate, or sell, a large portion of personal shares, which keeps the majority of the owner’s personal wealth tied up in the company.

With an equity recap, however, the owner is freed up to sell a large stake in the company. Some advantages of an equity recap include:

• Retaining some ownership.
• Obtaining an influx of capital for growth.
• Positioning the company for growth.
• Diversifying personal wealth.
• An opportunity to recognize significant future equity returns.
• Limiting financial risk, because the owner’s net worth is no longer tied exclusively to the financial fluctuations of the company.

Potential Pitfalls

If you choose to consider an equity recap restructuring, you should proceed carefully with legal assistance both during the initial share transfer and the subsequent resale. There are two specific pitfalls that you want to clarify, both regarding ownership:

• If retaining control of the business is crucial, you must make that fact clear early on in the negotiation process. Many equity recap transactions transfer a majority share of the company to the private equity fund.
• If you want to regain ownership of the company by buying back the debt at the end of the restructuring period, an arrangement must be worked out before the initial share transfer. Many equity recap transactions conclude with the company being sold to a third party with both the private equity fund and the owner relinquishing their shares.

Seek Expert Guidance

One of the most important steps when considering an equity recap is to seek expert guidance in the following areas:

• Determining the value of the company.
• Finding an intermediary who will explore investment interest in the private equity community.
• Performing due diligence when it comes to potential private equity partners.
• Clarifying the tax implications of potential debt and equity recap structures.
• Structuring the private equity recap transaction.
• Establishing a plan for growth following private equity investment.

Bottom line: An equity recap is a complex transaction that takes several months to complete and also has an interim period of several years. Yet many business owners have found it a preferable path to selling their companies outright or merging with other corporate entities. Contact Filler & Associates to get started.