- A recapitalisation avoids the risks of having personal/family wealth tied to a single business enterprise.
- The strategy allows for prudent diversification of one's wealth.
When public markets go through mood swings and become “liquidity sick”, what options do private businesses have in achieving liquidity?
What viable options do they have in unlocking wealth created through many years of hard work when the public market is no longer in favour? What is the next best alternative for the founder/family who still wants to keep control?
The answer to this question is a private equity recapitalisation - a financial technique which allows business owners the opportunity to cash out of their businesses while staying involved in the management and decision-making if they so desire.
Simply put, a partial sale of the business to a private equity buyer can accomplish many of the business owner’s stated objectives without selling 100 percent ‐ achieving some liquidity today, providing a path to additional liquidity on a future sale, and securing a deep‐pocketed partner who is committed to growing the entity.
Why this route? Here a number of compelling considerations. One of them is liquidity. Stated differently, business owners can realise significant personal/family liquidity by selling part of the business and extracting 80 percent to 90 percent or more of their company’s current value, while retaining a disproportionate share of the remaining equity.
The second benefit is diversification.
A recapitalisation avoids the risks of having personal/family wealth tied to a single business enterprise.
The strategy allows for prudent diversification of one's wealth. Thirdly, as the owner, one gets to participate in a “second bite of the cherry” in three to five years by maintaining a meaningful ownership stake – by aggressively growing the business, one can create significant additional wealth.
In addition to the benefits to the owner, recapitalisations also provide management teams an opportunity to participate in the equity of the business when they do not have the capital to do so.
Since private equity investors usually require and actively seek the support of the management team, it is likely that they may offer top management the opportunity to participate in the equity of the business either in the form of a buy-in and/or earn-in basis.
This could be an opportunity to pass on the mantle to your “day ones” and faithful management teams.
Of course, not all businesses need a recapitalisation. Certainly, if there’s a clash of values between the private equity and the founder/family, it won’t work.
If the same vision is not shared, it probably will not work also.
And, most importantly, if new partners do not have the depth and breadth to drive the business forward, it certainly won’t work. This is why businesses need to cautiously evaluate their new partners as some private equity players are just company looters and/or have zero value to add beyond the money.
In summary, as many family businesses see their founders nearing “retirement”, an equity recapitalisation provides them with a very viable exit option.
As such, this is an important tool that business owners can consider for their growth and liquidity options.
Mr Mwanyasi is the managing director at Canaan Capital