Acquisition Advisors | Owners of Midsize Companies Have Varied Liquidity Options
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18 Apr Owners of Midsize Companies Have Varied Liquidity Options

For owners of large and midsize companies, need for liquidity does not have to be an all-or-nothing decision. It really isn’t like the famous song by The Clash:
“Should I stay or should I go now? If I go it could be trouble. If I stay it could be double.”

When business owner(s) need or want to take big money home, they have options.

Sell Out

Selling out is what most business owners consider when they want or need a nice payday. Implied is the sale of all equity interest in the business. This usually means transition out of active management of the business. Although this scenario will yield cash for the seller(s), retirement and/or departure from the business may not be what you had in mind. The good news is that there ARE other options for securing some liquidity.

“Sponsored” Recapitalization

A traditional, or “sponsored,” recapitalization means selling a 30%to 80% equity stake to a private-equity firm (“sponsor”). Almost always, the business is simultaneously leveraged with as much senior and subordinate debt as the business can handle. This type of transaction is commonly structured:

  • with the owner-seller and/or the existing CEO or management team continuing to run the company
  • to allow the owner-seller to take a maximum amount of money off the table
  • so the owner-seller retains a material ownership interest

The liquidity event enjoyed by the owners under this type of transaction will be less than the 100% cash-out scenario, but it can be as high as 70% or 80% of what would be possible with the 100% sale, and the benefits to this approach are evident. For companies that are healthy, growing, and can attract the right equity sponsor, it’s not unusual for a seller to retain, say, a 20% interest that’s eventually worth as much or more than was his or her 100% interest.

Recapitalization is also a dynamite structure for the business owner who has a talented and loyal manager or management team that the seller wishes to reward. By finding the right equity sponsor, the manager or managers can gain some experienced and well-capitalized partners, continue to run the company, and increase their share of ownership.

If you’re interested in confidentially discussing your options with an M&A expert, call Acquisition Advisors at 877-525-4321. Ask for a dealmaker.

“Sponsorless” Recapitalization

A sponsorless recapitalization is recapitalization without an equity sponsor. Said in another way, it’s a recapitalization that minimizes the equity given up by the sellers. But it’s a little more aggressive than the simple debt-borrowing strategy below. This is because mezzanine capital providers are used, and a small equity interest is given up in the form of equity options or warrants. This is preferred by business owners who want to maximize their liquidity event – and get more than is possible via a simple senior debt round – while minimizing equity dilution.

Simple Debt Borrowing

Of course, every business owner can leverage his/her business to provide liquidity to fund a cash dividend. Currently, dividends are taxed at the same low rate as capital gains, so it’s also tax efficient. This option is for those who want to retain 100% control but need liquidity. The payout is typically less than 30% of what could be obtained by a total sellout.
If you want or need to take some cash out of the business for your personal liquidity needs, it’s not a black-or-white decision – sell or not sell. At least not for businesses with $1 million or more in annual earnings. Consider simple debt borrowing or recapitalization: sponsored or sponsorless.

Liquidity Options Example

Assume your company has the following characteristics:

  • $10 million annual EBITDA
  • Modest growth, meaningful diversification
  • $60 million equity value
  • No interest-bearing debt outstanding

Here’s a sample of what each of the liquidity options might yield:

Equity Proceeds* Retained Ownership
“Sellout” $60 million 0%
“Sponsored” Recapitalization Up to $52 million 20% to 70%
“Sponsorless” Recapitalization $30 to $35 million 80% to 90%**
Simple Debt borrowing $10 to $25 million 100%

* gross (pretax and pre-transaction fees)
** equity taken by mezzanine capital provider typically in the form of options or warrants

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