Using OPM for Partial Buyouts or Recapitalizations

Most of us think about Private Equity buyouts as being an “all or nothing” proposition.  But this is not true. Although many PEGs are only interested in 100 percent buyouts, many will consider partial buyouts.  These partial buyouts—which may take the form of a recapitalization—provide opportunities for those entrepreneurs who are not ready or willing to give up control of their company.


Utilizing a recapitalization (or recap) strategy, a business owner can take cash off the table to diversify his or her estate, to fund retirement, or just to get off the financial treadmill of having to reinvest company profits back into the business to fund growth.

For entrepreneurs who want to reduce their investment in the business but still want to maintain day-to-day control, a recap may provide the best of both worlds. PEGs generally are not interested in managing the day-to-day operations of a business, as long as the results are satisfactory. This means that the existing management and ownership can continue to manage the business as if nothing has changed. Of course, a big change has occurred. The owner is no longer risking his or her own net worth to fund the business, but instead is using OPM (Other People’s Money).

Another benefit of this exit strategy is that the entrepreneur is given the opportunity to create additional wealth when the PEG exits the business. The holding period for most PEG investments is a three- to five-year timeframe. In cases where there is extraordinary growth in the business, this “second bite of the apple” can be an even larger liquidity event for the owner than the initial transaction.

Recaps can also be used when buying out a retiring shareholder would put undue financial stress on the company. In such cases, it may be a better alternative to engage a PEG than to place the entire company at financial risk. Using Private Equity rather than bank debt may be more expensive from a “cost of capital” perspective, but it is a less risky alternative when it is clear the debt could strangle the company. This may prove to be a wise alternative, considering the frequency of recessions or other downturns in the business or industry.


About Gary T. Brooks

Gary T. Brooks has over 27 years of experience in the investment banking industry and has been involved in over 100 transactions. He is currently the CEO of ExitPlanPros, where he helps business owners grow their business while planning their exit.

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