Archive for the ‘deal structure’ Category

Leveraged Recapitalization

Tuesday, April 21st, 2009

In a leveraged recapitalization a the company being sold takes a loan for the majority of the purchase price, the new owners put in some equity capital, and the existing owners retain an equity stake.  For example, a company valued at $10,000,000 might be recapitalized as follows:

Existing owners equity capital: 1,000,000

New owners’ equity capital:       1,500,000

Bank Loan:                                7,500,000

Total Capital:                           10,000,000

The existing owners retain 40% of the equity in the company but pocket 9,000,000 in cash (less transaction costs and taxes of course).  The owners then grow the business and exit by selling (usually in 3 to 5 years).

There are of course issues with this deal structure, such as the ability of the business to repay the loan from cash flow, maintaining adequate capital to grow the business, how well existing owners and new owners can work together, the skills that each party brings to the table, and how major decisions are made.  An owner who wants to take money off the table, however, can take a lot of money out of the business while maintaining significant upside potential and gaining a new partner that brings skill and capital to the table.