We have a certain spouse in our family who sees things as being either black or white. The cones in her mental retina are incapable of gleaning the grey or any other shade from a given situation.

But oftentimes, possibilities lay in the grey. A good example is in the decision of when to sell a business. Business owners commonly face a dilemma of whether to hold on to their business, continuing to enjoy its financial rewards and the sense of fulfillment and purpose it gives, or cashing in to secure their future and lower their risk profile. Oftentimes, a need for liquidity, either for oneself or for a passive shareholder, may drive the owner to sell before he or she is ready. 

Adding to the anxiety, the question of when to sell can arouse all sorts of fears that had been suppressed or ignored over the years, such as:

  • What will I do with myself after the sale?
  • Will I have enough proceeds to support my lifestyle and philanthropic objectives?
  • Will the market for companies in my industry get even better than it is now?
  • And for some, will my being around the house jeopardize my marital status?

We’ve all been told we can’t have our cake and eat it too. However, when it comes to monetizing your business, that maxim may not hold. There is a path that a surprising number of entrepreneurs are not aware of, one that lies in that middle zone and lets them keep the cake while taking an outsized slice for themselves – a partial recapitalization. Rather than agonize over whether they are selling too soon, owners should give serious consideration to a recap because it allows them to continue to own and control their company while still addressing any liquidity needs or securing their personal finances.

A partial recapitalization is highly useful for those who still have the fire in their belly. In a partial recapitalization, owners bring in capital from a third party. The funds can then be applied to buying out a passive shareholder, facilitating a transition to the next generation, or allowing the primary owner to gain liquidity and wealth diversification, among other uses. The capital can be in the form of equity or debt, depending on the financial profile of the business and the risk tolerance of the owner. If equity, the third party purchases less than 50% of the company. Many equity investors seeking to provide growth capital will be satisfied with a 25% stake. Obviously, if debt, all of the company’s equity remains in the hands of the owner.

If you believe the growth of your business will generate future proceeds that materially exceed what you would get from selling today, a recap may be the right decision. After all, you’ll still reap most of the value when you do decide to finally exit.

Selection of the right investor, in terms of fit and style, is crucial. This may be obvious, but it should not be underestimated. And those owners for whom corporate governance is a foreign concept, or those who haven’t had to account to others (outside of their clients), must think long and hard about choosing this path. Even a 25% owner has rights, primarily to ensure that owners don’t stray off the reservation.

The new investor will also have her own investment requirements, depending on her strategy. Equity investors look for growth and will want to see positive industry dynamics, an ability to increase market share through acquisitions, and a clear exit strategy. Lenders will want to see a clear history of positive cash flows, a defensible market position and an ability to repay the debt.

So, to recap (pun very much intended), don’t view the decision to sell your business as binary. A recap may take the cake.

About Berkery Noyes

Berkery Noyes is an independent investment bank that provides M&A advisory and financial consulting services to middle market companies in the information and technology industries. The firm offers skilled transaction management to publicly traded and privately held businesses and private equity groups in both sell-side and buy-side transactions. Berkery Noyes has managed over 500 transactions, ranging from several million to more than four billion dollars in value.

About Martin Magida

Martin Magida is a Managing Director at Berkery Noyes, where he primarily assists clients with raising growth capital in the debt and equity markets. He also provides M&A advisory services to companies throughout the middle market. Martin holds a BA in Political Science from Union College and an MBA in Finance from the Leonard N. Stern School of Business at New York University, and is a Chartered Financial Analyst.