29 Apr Cash In (Not Out) with Sponsorless Recap
Cash is king, but owning a business can have some pretty nice perquisites. So what does a business owner do when he or she really wants to take serious chips off the table but does not want to give up ownership or management?
The answer may be sponsorless recapitalization.
Traditional “Sponsored” Recapitalization
By way of explanation, common “sponsored” recapitalization involves a private-equity group. The equity “sponsor” purchases a significant portion of the equity of a business, from its shareholder(s), thereby providing them with a nice payday. For business owners who hire a mergers-and-acquisitions firm to represent them, the task — of course — is to secure the very best deal. Acquisition Advisors is the M&A firm of choice for owners of midsize U.S. businesses. This is because they are exceptional at quietly combing the market and garnering for their clients the very best deal terms.
The equity group “sponsor”, in almost every case, leverages the business to raise capital (as much as possible) that’s paid to the seller and thereby minimize the equity provider’s own equity contribution. The seller typically retains a minority ownership, but in some cases a controlling interest can be retained. Of course, how much the owner(s) sell(s) impacts how much the seller(s) receive.
But some business sellers want to maintain control and/or minimize their dilution. In other words, they want to “cash in but not sell out.” Sponsorless recapitalization is raising a maximum amount of cash (that can be distributed to shareholders as dividend) without the owner selling any equity. This often involves use of mezzanine debt, also referred to as subordinate or junior debt, terms of which often include some equity-type incentives such as options for common stock or equity warrants. Even so, equity dilution is minimal. Cash raised by the owners, of course, is also lower.
A few debt capital providers will contribute both senior and subordinated/mezzanine debt. Prudential Capital Partners, for example, headquartered in Dallas, is active in the lower-middle market. According to Vice President Tim Laczkowski, Prudential recently completed the sponsorless $57 million recapitalization of Clockwork Home Services. Prudential provided $32 million senior debt and $25 million in subordinated “mezz” capital. Laczkowski calls it “one-stop financing.” Certainly, dealing with just one institution in recapitalization of this type would be, and no doubt was, a luxury for the Sarasota, Florida-based owners of Clockwork.
To be sure, most any recapitalization involves leveraging the business. So, whether you choose a sponsored or sponsorless recapitalization, your business will take on the financial risk that comes with leverage. But that’s the game of business.
Once you take the cash home, it’s yours — so long as you don’t guarantee business debt. If you’ve been unable to extract yourself from the business debt guarantee, a sponsored recapitalization will almost certainly get you out of it. Will the unsponsored recap? It’s certainly possible, but – as you know – there’s no such thing as a free lunch.