By: THOMAS BRINSKO, CEO, BIC Alliance

Deciding to sell all or part of your company is no easy decision. Many small business owners who have built a successful company are often torn between taking chips off the table and pushing harder to take their company to the next level of success.

Growing the company further would have a greater payoff when the owner finally decides to exit, but there is no guarantee. Currently, rosy business conditions can change quickly. The owner may need more capital to grow the business yet may not wish to personally guarantee more debt. And if the company experiences tough times, it would be worth less tomorrow after investing more equity and time in the venture. The question boils down to this — do you sell the company now while times are good, or do you hang on and bet that things will continue to get better, perhaps borrowing funds to grow even faster while the opportunity is there?

There is a potential answer to the question that lies in the middle. It is an option that allows the owner of a successful company to mitigate overall business risk and take some money for his or her family now, but still allows them to see out the growth of the firm they started. Further, the owner can be absolved of any personal guarantee on any existing debt and future debt secured to grow the business.

It is like getting two bites at the apple — enjoy some of the fruit now, but continue to grow the fruit larger and sweeter, and eat again later. The scenario is called a leveraged recapitalization or leveraged buyout, sometimes referred to as an LBO.

The scenario generally works like this: First, the owner will sell a majority interest in the company to an investment group, typically a financial buyer who may have deep general business expertise, but no specific expertise in the particular business. The advantage of a financial buyer as a partner is that the original owner is usually left “in charge” of the operation. The investment group doesn’t really know the business; they just like the way you have run it in the past, or they wouldn’t have made the investment.

Also, the owner will get some sort of “premium” for the part of the business sold. Typically, the owner may get 70-75% of the company’s value in exchange for 51% of the stock. This “funny” math can work because the investment group brings in banks or lenders that are part of the total recapitalization package. The minority interest in a smaller privately held company is not worth as much on a pro rata basis until that interest is sold.

Now the owner has a deep-pocketed partner with lots of business acumen. This partner is in the business of making money and will make sure the owner has the resources, investment and business plan necessary to grow the firm accordingly. The typical goal is to triple or substantially increase the value of the company and sell to another group.

This second sale is the proverbial second bite at the apple. The 49% original owner will participate in the sale of a company at least three times as large as the original business. Ultimately, the owner gets much more money for his or her equity than an outright sale might have garnered. Mitigating risk by taking money off the table much earlier in the process, and during the interim, the owner gets to make a very comfortable living running the company they began.

Leveraged recapitalization: The top 5 benefits to the owner/seller:

• Pull 70% of value from the firm and still own 49% of the company.

• The owner will have the investment group as a partner going forward. They bring general business expertise and deep pockets for future growth.

• Despite minority position, the owner is typically still “in charge” of the operation as the investment group usually likes the way it is run, or they wouldn’t have invested.

• The owner does not personally guarantee any new debt, and his or her guarantee is removed from any existing debt.

• Because the owner still has a 49% share, he or she has a chance to “double dip” when growing the business further with the investment group and selling down the road. The owner’s exit strategy may be negotiated as part of the first deal.

For more information on what a leveraged recapitalization would look like for your business, contact Thomas Brinsko at (281) 538-9996.