You may be considering selling your business or recapitalizing to realize greater wealth or increase liquidity. But which approach will work best for you? Following are key considerations for each.
Your Business for Sale—What to Expect
When evaluating whether selling your company is the appropriate path to pursue, you as a business owner should think about the following.
- Strategic buyers could be larger companies in your industry, similarly sized competitors, or companies in adjacent industries.
- Often the buyer—especially when it is a private equity firm—may request, or even require, that the previous owner stays involved in the business, either in a management or advisory role.
- Buyers may require sellers to “roll over” a portion of the sale proceeds as an equity stake in the acquiring company.
- There may be an “earn-out” component to the seller’s compensation, where a portion of the sale proceeds are paid up front, and the remainder is paid when/if the company meets performance or timing goals post-transaction.
- An outright sale may be an attractive option for a company whose owner is getting ready to retire and has no likely successor.
Pros and Cons of a Dividend Recap
With an equity recapitalization, which may also be referred to as a minority sale, your equity would be reduced by the amount sold to outside investors. With a debt recapitalization, you as the business owner would retain 100% of the equity ownership. (See definitions of dividend recapitalization, and equity and debt recaps)
- Dividend recapitalizations can be an effective way for owners to “take some chips off the table” while retaining control of the company.
- In the case of an owner who wants to run the company for an extended period and believes that the company has significant growth opportunities over the next several years, a recapitalization exit strategy allows the owner to cash out some of his or her equity and still participate in a sale down the road (i.e., “take a second bite of the apple”).
- Dividend recapitalizations can also work well in situations where some family members want to retain ownership of the company while others want to liquidate their positions.
- Not every company is a candidate for a debt recapitalization because taking on the additional debt could hurt the company’s future performance. But for companies that have relatively low levels of debt, have a history of consistent profits and cash flows, and operate in industries with low cyclicality, a debt recapitalization may be an appealing option, especially when interest rates are low.