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What is a Majority Recapitalization?

Jonah Pollone

Sellers Seller Articles Seller FAQ

As a business owner, you’ve probably been approached many times about selling your company - by competitors, private equity groups, and even individuals.

Chances are, you’ve decided to stay in business but have heard the term “majority recapitalization” thrown around in the context of selling. 

But what is it, and is it an option you should consider? 

As we’ll discuss further, a majority recapitalization is a way for you to take some chips off the table while remaining involved with the business. 

This article will cover what a majority recapitalization is, how it works, and if your business is a good fit for one. We also include some example scenarios to help you think through what’s possible for you and your business, and if a majority recapitalization is right for you. 

Let’s hop in. 

The Purpose of a Majority Recapitalization

A majority recapitalization (majority recap) allows you to sell a portion of your business to a private equity group (PEG) while still owning a minority of it. PEG’s may offer to do a majority recap if they want to invest in your business while valuing your expertise, leadership, or strategic vision. 

After the majority recap, you will help operate and grow the business while maintaining your minority share - usually 10-30% of the business. Private equity groups will usually plan to sell the entire business 3-7 years after acquiring the majority stake in your company. 

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Before agreeing to a majority recapitalization, have a transaction attorney review the offer to make sure you will not be held responsible for debt.

In an ideal scenario, once the business sells for a second time after the 3-7 year hold period, the business will be worth more than when you originally sold the majority of the company. As a result of the growth of the company, the minority share could end up being worth more than the majority you originally sold to the PEG. 

If you are unsure of when you want to fully exit the company, a majority recap may not be the right option for you since the PEG’s end goal is a sale of the business in 3-7 years. 

Is a Majority Recapitalization Right for You?

Any business can perform a majority recapitalization, regardless of size. However, it is most common for larger companies to do a majority recap. 

Why? Most private equity groups invest in companies with a minimum of  $500,000 to $1,000,000 in EBITDA

Majority Recap Versus Full Buyout of The Business

There are a handful of reasons you may want to do a majority recap instead of a full buyout, such as: 

  • You’d like to take some chips off the table but want to stay involved in the business
  • You’d like to have a lucrative second sale once the private equity group sells the business in 3-7 years
  • You have reached your management capability and would like help in managing/growing the business
  • You have a lot of money tied up in the business
  • You are going through a divorce or partnership dispute and need to free up liquidity
  • You are planning your retirement, and you want to gradually phase-out of the business 

A majority recap is a great way to reward your managers with equity in the business. Private equity groups may give key employees a small percentage of ownership (often 5-10%) to provide an incentive to stay on with the company.

After reading this article, maybe you’ve decided a majority recap isn’t right for you. A full buyout is a better choice if: 

  • You are experiencing health issues 
  • You want to retire in the next year or two 
  • You want to pursue other business interests
  • You’re an entrepreneur at heart and don’t want to be someone else’s employee

How Much Control do You Have After a Majority Recapitalization?

The amount of control you have after a majority recap will depend on the type of private equity group that purchases the majority of your business. 

If you sell to a PEG through a majority recap, even if you are still the president of your company, you are now an employee. Now have to answer to someone else - something you’re probably not used to after years of business ownership. 

Generally, PEG’s will work to place you in your highest and best use activities because it is in their best interest. They’re financially invested in you succeeding and leading the company based on your skills instead of being bogged down by administrative tasks. 

Some private equity groups may be hands-on and require you to attend regular meetings. Other PEG’s may be passive financial investors. 

During the buyer screening process, have your broker vet the buyer before you go under contract to determine what the PEG will ask of you post-sale. 

Should You Use an M&A Advisor For a Majority Recapitalization?

Since a majority recapitalization is not an outright sale of your business, it can be easy to assume that you do not need a merger and acquisition advisor. However, an M&A advisor offers many advantages:

  • They’ll perform a valuation of the business to make sure you’re not leaving money on the table
  • They have experience with deals and can perform sanity checks on offers you receive
  • They can help manage the sale while you manage your business
  • They have experience vetting private equity groups to find the right fit
  • They can negotiate on your behalf to get you favorable price and terms
  • They can mediate requests between you and the buyer to keep things amicable

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Even if you have already received an offer from a private equity group, a broker can help you analyze the offer and then navigate the deal to ensure you get the best terms.

If you are considering a majority recap and want to get the help of a quality M&A advisor, check out our blog on how to find a good business broker.  

Decide If a Majority Recapitalization is the Right Choice For Your Company

A majority recapitalization may be the perfect alternative to a full buyout of the business or it may not be. Ultimately, it is up to you to decide if a majority recap makes sense for you and your company. 

If it is compatible with your goals, it can be a great solution that allows you to continue growing your company for a few more years with the help of a private equity group. 

Deciding to sell your company or sell a majority of your company is a large decision, which is why it is key that you identify if you are ready for the process. Learn why owners decide to sell by reading “Why Do Owners Sell Their Business?” 

If you want to discuss the advantages and disadvantages of a majority recapitalization more in-depth, reach out to us at MidStreet Mergers & Acquisitions today. 

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