Cleveland, OH, January 17, 2020 – Carleton McKenna & Co.’s Vice President, Brooke A. Hradisky, shares thoughts on maintaining ownership and operational control through a minority recapitalization in Crain’s Cleveland. The original article, “Taking Chips Off the Table”, is part of ACG Cleveland’s sponsored content and can be found here.
Taking chips off the table: Minority recapitalization an ideal bet for some business owners
By Brooke Hradisky
The vast majority of a private business owner’s wealth is typically tied up in one significant asset – her business. A considerable exit in the future may allow the business owner to experience a meaningful liquidity event and implement a comprehensive estate plan. However, all businesses are susceptible to an unpredictable catastrophic event (internal or external) that could put a business sale at risk.
As such, we implore business owners to ask themselves – or even better, their wealth managers – should you be holding nearly all your eggs in one basket? Would your wealth manager do it in your stock market portfolio? If not, how is your private company stock any different?
A minority recapitalization is one solution that allows owners to “take some chips off the table” while maintaining both ownership and operating control. In a minority recapitalization, debt and equity capital is used to fund a significant distribution to the owner. Typically, 10% to 40% of the business is transferred as part of attracting junior capital. The investor taking a minority equity position will most likely be a financial or family office sponsor in conjunction with a senior commercial lender.
Of course, the value of the business owner’s remaining equity ownership post-transaction depends on the company’s financial metrics (future revenue and profitability, long-term debt), growth capital needs, and percent ownership retained.
The most apparent benefits include: creating liquidity and diversification of assets; retention of operational control and majority ownership; benefit and discipline of having a partner to help with strategic decisions; and the opportunity to delever and have follow-on transaction options. Looking at one’s public stock portfolio in conjunction with private stock is often overlooked – and minority recapitalizations are often ignored when considering transaction options to be vetted as an alternative to no action or to full a sell-side transaction.