This is the third and last 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.
Cons of a Majority Re-capitalization
At Their Mercy
You become a minority shareholder in a company you no longer control. This means the private equity group will decide when/if they want to sell your business. So if you're counting on that second chunk of cash to do something you've always dreamed of, you may have to wait a while -- unless you negotiated a "put option". A put option entitles you to sell your remaining shares to the acquirer at a pre-determined valuation, but they are hard to get from most acquirers.
Listen to Tyler Smith as he used a put option to limit his downside when he sold SkySlope to Fidelity National for €80 million.
You May Not Like Their Changes
A private equity group will usually invest in your business if they see a way to improve it. That means they will likely make changes to your company you hadn't thought of, or may not agree with. For a proud founder, that can feel like open heart surgery without the anesthetic.
Hear why 90% of Sherry Deutschmann's employees left after a private equity firm acquired LetterLogic and gutted its bonus plan.
Your Apple May Rot
Although most private equity groups are savvy, some are not. They may underestimate or discount the delicate alchemy that is your company and screw it up, leaving you with little or nothing for the second half of your shares.
Listen to Ryan Moran as he describes losing a 7-figure slice of his company when he sold to private equity and they brought in a new CEO.
Narrower Margin of Error
Remember that most private equity acquisitions are financed by borrowing some of the money. Your business will need to pay that money back -- harder these days with higher interest rates -- so you'll have a narrower margin of error to manage your business under the burden of that debt. Suffer a few lean months, and life could get nasty, very quickly.
You May Get Fired
Once you become a minority shareholder, you no longer control things and it's possible -- depending on your agreement --- that you could be fired from your own company. In Lloyed's case, he struggled to get used to life under new leadership.
In his own words, he became an "insufferable" employee so eventually Lloyed and Radian came to the conclusion he was probably not the best person to run Boast anymore.
Article of Built to Sell / Valuebuilder, September 2023