Business Owner Dilemma – Sale or a Recapitalization?

If you are a successful business owner, at some point in the future you will have to consider options to get liquidity for your business.  When I say “liquidity”, I simply mean you want to receive cash for the value of your business through a sale or recapitalization.

To generate liquidity, a business owner has two key options.  One option is to just outright sell your business to an interested buyer for a majority of your shares.  A second option is to complete a recapitalization where you typically retain a sizable ownership percentage but receive partial liquidity.  It’s probably best if I describe below the pro’s and con’s to each strategy, and then you can decide what is best for your situation:

SALE OF YOUR BUSINESS

Pro’s

Great if you are looking to retire and remove yourself from the business

If not an evident succession plan in place with other management, a sale can help preserve the existence and prosperity of the business

Provides the greatest amount of liquidity, sometimes for 100% of your ownership

Still can provide an owner the opportunity to re-invest back into the business for a minority ownership

Probably will receive highest value for the business if a sale process is run

Con’s

Typically an owner gives up control in a sale transaction

If an owner wishes to remain active in the business following the sale, they will have to get used to working for a new owner

Lower management might be frustrated that the business owner did not approach them first about a potential management led buy-out

More risk that firm culture is impacted with new outside ownership

More risk in a sale transaction closing compared to a recapitalization (longer process)

 

RECAPITALIZE YOUR BUSINESS

Pro’s

Great if you want to remain active in the business but wish to receive partial liquidity

Allows for asset diversification as most business owners’ wealth is tied up in their business

Potential to receive partial liquidity but retain 100% ownership of the business

Company culture typically stays the same as management does not change

Can provide opportunity for other key managers to participate in equity of the business

Recaps typically take less time to complete relative to a sale

Con’s

Recaps typically involve adding debt to a business, which some owners may not like

Larger debt loads means more scrutiny from lenders if performance suffers

Tougher for a business owner to fully exit the business compared to a sale

 

 

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