What is a Recapitalization Exit Strategy?

One of the exit strategies available to company owners is called a recapitalization, or “recap”.

In a recapitalization, an investor (usually a private equity group or “PEG”) purchases an equity interest in your company using a combination of cash and debt financing. They expect to grow the company and earn an attractive return on their cash investment when they sell the company at a higher price in 3-7 years.

Most often, the PEG acquires a majority (controlling) interest and doesn’t play a role in day to day management. They bring financial acumen, systems and growth capital, sit on the board, and participate as a strategic partner.

In most cases, part of the recapitalization strategy is to accelerate the company’s growth and maturity. A recapitalization gives an owner significant liquidity now AND gives them a second larger bite of the apple when the PEG is ready to exit and the company is sold entirely to another PE firm or strategic acquirer.
A recapitalization can also facilitate:
  1. the buyout of specific shareholders,
  2. the transfer of partial ownership to the next generation, and
  3. equity participation by management.
Prospect Partners, a respected Chicago-based private equity firm active in the lower middle market, wrote this article on how recapitalization works and how companies and their owners can benefit from this strategy:  “How a Recapitalization can Help Boost the Business”.

Al Statz is the founder and president of Exit Strategies Group. He is based in Sonoma County California. For more information on recapitalization or to discuss your strategic exit alternatives, contact Al at 707-781-8580 or alstatz@exitstrategiesgroup.com.