Business Owners: Have Your Cake And Eat It Too!

  • Owners who sought a business exit during the 2008-2011 timeframe were forced to place their exit plans on hold. The 2008-2011 exit window was closed for many owners due to lackluster company performance, frozen debt markets and lower valuations. Thankfully, businesses have recovered extremely well since 2008; the painful recession is out of sight and mind.

    Business owners have enjoyed record business profits since the recession. Owners leaned out management and administrative functions and have yet to restock their companies with human capital at the same pre-recession levels. As a result, consistent 5-10% revenue growth rates have translated into outsized margins.

    While this profitability has driven owners to maintain businesses and “clip coupons”, many owners have wondered how much runway is left in the current economic and M&A cycle. CEO confidence, as measured by PWC and The Conference Board, has declined over the past few months. Robust valuations remain in the M&A market, but data suggests values are cresting as evidenced by peaking third quarter deal valuations and lower 2015 transaction volumes.

    How does a business owner address future economic headwinds, capitalize on current M&A markets and recent company performance, de-risk personal holdings and maintain significant ownership and company leadership? In our opinion, the answer is a recapitalization (“Recap”).

    A Recapitalization is a transaction in which a privately-held company sells a majority or minority interest to a private equity investor. In a recap, the entrepreneur achieves a significant liquidity event, retains significant ownership and many times remains an active leader in the business. Recapitalizations are attractive for those business owners interested in limiting future risks and participating in future growth of the business from an equity ownership perspective and/or operating perspective. Recapitalizations also provide business owners an outlet for companies at an inflection point whereby the Company needs to invest in more people, equipment or even pivot out of core market segments. Furthermore, recapitalizations represent opportunities for employees to step into leadership and ownership roles perhaps not available previously.

    A recent Nolan client recapitalized their $5MM EBITDA business with a national private equity group at a valuation of $40MM or 8.0x EBITDA. Client was able to achieve a $35MM liquidity event and maintain 28.6% of the recapitalized business. Prior to closing, the client had limited estate diversification, substantial personal financial risk and was faced with significant business investment required to maintain current performance. The recap secured the business owner’s financial future, transferred risk to the financial sponsor and left the business in the capable hands of his management and a sophisticated, well capitalized and culturally-aware private equity group. 

    Recapitalizations are excellent solutions for business owners seeking to take chips off the table, mitigate risk exposure, transfer leadership to a new generation and partner with a private equity group that has the deep pockets to invest in the future of a business. Please contact any one of Nolan’s investment banking professionals to determine if a recap is a solution for you.