Many businesses that were experiencing solid growth and executing good business plans pre-pandemic had the brakes put on starting in the middle of March and subsequently hemorrhaged capital adjusting to the new environment. Some grew reluctant to take on debt to replace it and now find themselves unable to take advantage of an improving business environment. Others that wished to leverage the opportunity were unable to secure loans because banks and other conventional lenders had turned bearish and unwilling to lend. Faced with these circumstances, what’s a business to do? Consider a recapitalization of the business or “Re-Cap”.
The Private Equity community is very active in the lower middle market. Acquiring firms through re-caps has become a preferred transaction type. In a re-cap, Private Equity Groups (PEGs) buy a majority share, and in some cases a minority share, of the company by acquiring 60% to 70% of a firm with ownership retaining the rest. This gives the owners an opportunity to take some money off the table, but just as importantly, sell the retained shares when the PEG exits their investment a number years later. Sometimes this retained ownership position is more valuable than the original stake sold to the PEG. We call this getting a “second bite of the apple.”
PEGs like the idea of keeping ownership and management in place. In turn, they provide capital to execute growth plans and bring on operational support where needed. Both are a significant part of what PEGs can offer and equally important. Most PEGs are staffed with people that have long experiences operating businesses of all types. Combine this with their access to capital and you have a powerful one-two punch to re-start or amp up the performance of a business in difficult times.
In this difficult time, many good companies need low risk capital. If you find yourself in this position, then you may want to consider a Re-Cap.