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

Growing the company further could yield a greater payoff when the owner finally exits, but there are no guarantees. Business conditions can change quickly, additional capital may be needed, and the owner may not wish to personally guarantee more debt. If the company experiences tough times, it could be worth less after investing more equity and time. The question is whether to sell while times are good or hang on and bet that things will get better.

There is a potential middle-ground solution: a leveraged recapitalization, or leveraged buyout (LBO). This option allows an owner to reduce overall business risk and take money off the table for his family while remaining involved in growing the company. It may also eliminate personal guarantees on existing and future debt used 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 generally works like this:

First, the owner sells a majority interest in the company to an investment group, typically a financial buyer with broad business expertise but no specific knowledge of the company’s industry. The original owner usually remains in charge of operations because the investment group believes in the business and the way it has been run.

The owner may receive 70% to 75% of the company’s value in exchange for 51% of the stock. This seemingly unusual math can work because the investment group brings in banks or other lenders as part of the recapitalization package. A minority interest in a smaller, privately held company is generally worth less on a prorated basis until that interest is sold.

Now the owner has a well-capitalized partner with significant business acumen and the resources, investment and business plan to help grow the firm. The typical goal is to triple or more than triple the company’s value and sell it to another group.

This second sale is the proverbial second bite at the apple. The original owner, retaining a 49% interest, participates in the sale of a company worth at least three times as much as the original business. Ultimately, he may realize substantially more for his equity than an outright sale would have generated while reducing risk early and continuing to earn a comfortable living running the company he built.

Leveraged Recapitalization: Top 5 Benefits to the Owner/Seller

1. Retain Ownership: Receive 75% of the firm’s value while retaining 49% ownership.
2. Strategic Partnership: Gain an investment group as a partner, bringing business expertise and financial resources to support future growth.
3. Operational Control: Despite holding a minority stake, the owner typically maintains day-to-day operational control, as investors value the existing management.
4. Reduced Personal Liability: The owner is not required to personally guarantee new debt, and existing personal guarantees are removed.
5. Second Opportunity for Profit: By retaining 49% ownership, the owner can benefit from future growth and a potential second sale. An exit strategy may be negotiated during the initial transaction.

For more information, visit ivsinvestmentbanking.com or call Jeremy Osterberger at (281) 538-9996.