Private Equity Recapitalisation: How To Sell Your Business Twice!
Selling your business in two parts can be a great way to extract a price that is could be several multiples of what you’d make from selling the entire company in a single transaction.
This is achieved, of course, by selling part of the equity to a private equity group, taking a “bite of the apple” so to speak, while retaining a large share in the business. The private equity firm’s resources and capital can be used to fuel fast growth prior to selling the rest of your shareholding in a few years in what has now become a much larger business i.e. take a “bite of the apple” and let the apple continue to grow on the tree.
This Divestopedia article explains the mechanics complete with example calculations.In their example, the business owner walks away with $28 million rather than $20 million, but are real life examples around of business owners increasing their total payout from under $5m to an excess of $20m.
This technique does require patience. The typical time frame between the sale of the first and second tranches of shares could be as much as 5-6 years. And owners need to commit to continue working in the business till the eventual sale of the second tranche.
Such multi-tranche sales also allow, in many cases, for a reduced tax bill as gains are spread over several years.
The Risks of a Recap
Obviously, we went through a very simplistic example with lots of fictional assumptions, but it illustrates the upside for this type of transaction. As with most things, there are also downsides to consider:
- Bob is no longer the boss. The PE will set up an advisory board and empower the new management team to drive the business going forward. Most business owners find it difficult to relinquish control.
- After the transaction, the company will carry a significant amount of debt. Most business owners are cautious about high debt levels.
- The value of the company on the second exit is not guaranteed, nor is the timeline known. Many variables could derail these plans.
- There is a risk of choosing the wrong PE partner.