Many Exit Planning experts and other business consultants spend a lot of time extolling the virtues of private equity recapitalizations as a method for business owners to “take some chips off the table” while maintaining operating control of the business. I too am guilty of this charge. I have often written about these types of “recaps” and have on occasion recommended them as a possible Exit Strategy to my Exit Planning clients over the years.
Yet there is a down side to these types of Exit Strategies that you should be aware of as a business owner thinking of selling your business. I want to point out just a few of the negative aspects of private equity recaps:
Private Equity is the most expensive money you can find. Private equity sponsors look to grow your business to provide the return on equity on their investment. They usually seek double digit returns that are much higher than other sources of capital such as bank borrowings.
PEGs will borrow against your assets. If the private equity group is going to acquire your business and include some equity in the successor corporation as part of the purchase price, you need to realize that they are going to leverage your assets. In this case, the equity sponsor is not contributing capital to your balance sheet but is creating a new corporation and giving you equity in that corporation. This is technically not a recapitalization but I mention here for a reason. Many private equity buyers as well as investment bankers, business brokers and other advisors consider this structure a “recap” but it is not.
Why would you want a partner at this point? These arrangements may create risks with respect to the future viability of your company. They may also require you to manage the business in a way that is counter to the way you have managed the business in the past. Are you prepared to run “your” company “their” way?
Recapitalizing your business may change or destroy the business culture and personal lifestyle that has taken you years to achieve. If you plan on continuing to manage your business after the transaction, it’s important to consider these and other possible problems in light of the potential upside of any deal.
