Peter Holton, managing director of Caber Hill Advisors, Chicago, shares the following insights regarding why business owners should consider recapitalization.
Private equity firms face a dilemma: They have too much money sitting on the sidelines—much of which is earmarked to invest in residential and commercial roofing businesses—yet they cannot find enough quality companies in which to invest.
At the same time, the U.S. is on the verge of what some call the “Silver Tsunami,” with thousands of baby boomer business owners approaching retirement age and exploring their options for the next phase of life. How is it possible to bring private equity firms and roofing company owners together for mutual gain? The answer is recapitalization.
Baby boomer business owners struggle with the decision of whether to continue to grow their business; sell their company to a corporate or strategic buyer; transition the company internally; or, in rare cases, liquidate the business. Ultimately, many business owners just cannot let go. They may not want to give up the lifestyle business ownership affords; they still have the energy and passion to continue running their own company; and/or they feel a sense of obligation to take care of their employees. Recapitalization can help support all of this, allowing an owner to sell a portion of equity, fund growth and maintain a steady organizational structure.
You should consider recapitalization for the following reasons:
- Diversification: Diversifying to prevent the risk of having too much personal net worth in a single asset
- Growth: Fund growth, via mergers and acquisitions, or entering new markets without taking on the risk of personally guaranteeing a loan
- Flexing new muscles: Private equity investors can bring different concepts and ideas to grow the business and can help recruit a higher level of executive talent
Recapitalization can be the best of both worlds for a business owner. It allows an owner to sell a significant ownership stake in his or her company for cash; because most owners have the bulk of their personal net worth tied up in their companies, this creates personal diversification while retaining shares in their business. Alongside their private equity partner, they will continue to grow the business—potentially at a faster rate—and sell it again in the future, liquidating their remaining shares for an even greater gain. Meanwhile, the original owner can remain as CEO or board chair, ensuring continuity and control over daily operations.
One of the key metrics for private equity firms is a well-rounded management team. In addition to talent, they get excited when they see management teams have a personal investment in the company. Recapitalization typically creates the opportunity for key leadership to buy into the business while also earning additional equity incentives for performance. This allows business owners to take care of their employees without unnecessarily diluting their original stake in the business.
Baby boomer business owners are searching for answers. As owners struggle with what their best available options are, it is worth considering recapitalization, which allows owners to sell a portion of their equity, fund growth and create a stable company for the future.
