This is the second of 3 articles about exiting your business through re-capitalization.
When most founders think of an exit, they think of the giant company swooping in and writing an enormous check to buy all of their shares. However, the more likely exit for a lot of owners is something that looks more like half an exit. It's called a "majority re-capitalization" or "majority re-cap" and there are pros and cons.
First, let's deal with the definition: a majority re-capitalization is where you sell more than half (hence the term "majority") of your shares to an investor and "roll" the rest of your shares into a new entity the acquirer sets up to own your business.
You become a minority shareholder in your former business.
Pros of a Majority Re-capitalization
Take Some Chips Off the Table
Unlike a VC who invests in your company to fund its growth and expects you to leave most of their cash in your business, when a private equity group does a majority re-capitalization you can usually take most (or all) of the money and put it in your jeans (called a secondary). You diversify your personal balance sheet and keep some skin in the game.
Keep Your Job
This may be a pro or con depending on how you feel about your job, but in most private equity majority re-caps, they want the founder to stay on and operate the businesses they invest in. You get to cash out some of your shares and keep your day job.
In 2017, Randy Woods sold his digital agency Non-Linear Creations to the private equity firm Valtech. Today, Woods remains with Valtech happily talking to potential sellers from around the world.
As in the hypothetical example above, most private equity groups are run by savvy, experienced operators who are good at increasing the value of your business. They have an eye for efficiency and often bring experience from multiple industries to your company. They are typically seasoned negotiators which means they drive a hard bargain when it comes to selling the second tranche of your equity. Therefore, your company may grow in value under their ownership and it's possible that your minority slice of equity becomes more valuable than your original exit where you sold the majority of your shares. Private equity groups refer to this as a "second bite of the apple".
Sarah Dusek had built Under Canvas to €3 million in EBITDA when she decided to sell a majority stake to the private equity group, KSL Capital. She retained 25% of her equity and continued in her role as CEO. When she eventually stepped down, Under Canvas had a valuation exceeding €100 million.
Article of Built to Sell / Valuebuilder, September 2023