How it works:
In the original transaction, the business owner(s) sell 100% of the business to an investment group or a partnership team. The business owner(s) may re-invest proceeds from the original transaction into a minority equity position (between 1-49%) in the new company.
The investment group combines industry relationships and access to resources w/the business operation team to develop business expansion via organic growth and through add-on acquisition targets. Within a 5-7-year horizon, some investor groups do not have time mandates to sell; the group will seek sizeable investment partners to buy out the interests of the new larger company. As the scale of the new company grows, investor groups will likely target a high 8 or 9-figure transaction once the company goes to market. The scale of this second transaction can create a lucrative payout for the original business owner(s) far beyond the potential of a single sale transaction.
The business founder may not want to sell 100% of their company, but the metrics may not align to grow the business to sell for a desirable multiple w/in their transition horizon. What does it look like to exponentially grow the business, maximize the seller’s benefit, and retain ownership? Real world case study: President (8 years) of an industrial new construction plumbing company w/165 employees owns 30% of an operation that creates $44m in annual revenue. The business sells to an investment group with two platform operations on the East & West coasts. The president re-invests 20% of his proceeds from the first sale into the new company. Immediately after closing, the platform generates $120m of combined revenue, and the president’s 20% minority equity in the new company is more valuable than his 30% of the old company. While the enterprise value increases exponentially at closing, the additional investment group resources infrastructure, assets, resources, networks, etc., create immediate growth opportunities to maximize the total enterprise value.
Majority recapitalization strategies work across several industries. Businesses in the lower middle market have the infrastructure and management teams that investor groups seek. Many investor groups held on to cash reserves and waited out the global pandemic, which brought global commerce to a screeching halt in the spring of 2020. While those groups sat on the sideline waiting for a return to normal, hundreds of businesses disappeared, good businesses got leaner and stronger, and great businesses like yours continued to cut payroll checks and keep the economy moving. Those investment groups are ready to invest in great companies that stand on a solid foundation and are ready to maximize opportunity and growth potential.
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