General, Mergers and Acquisitions, Mirus Capital Advisors
Every Owner Exits – Part III
This month, I conclude my series on exit options (see Part I and Part II) with a discussion of recapitalizations and ESOPs.
Minority recapitalization is a type of investment in which an investor provides debt and equity capital in exchange for a less than 50% ownership stake in a company.
- Capital can be used for shareholder liquidity and/or growth initiatives.
- This type of investment can be an attractive alternative to a majority or full sale of a company because it allows business owners to realize similar levels of cash proceeds while retaining control of the business.
Dividend recapitalization is when a private equity firm or owner issues new debt to raise money to pay a special dividend to the shareholders.
- The dividend reduces the risk for the PE firm / owner by providing early and immediate returns to shareholders but increases debt on the portfolio company’s balance sheet.
- A dividend recapitalization is often undertaken to free up money for the PE firm / owner to give back to its investors, without necessitating an IPO, which might be risky.
- A dividend recapitalization is an infrequent occurrence, and different from a company declaring regular dividends, derived from earnings.
In deciding which option to pursue a business owner must balance the probabilities of a favorable outcome with potential benefits and costs. For instance, it would make no sense for a slow-growing, small and marginally profitable company to seek an IPO. The business characteristics would likely not attract enough buyers and the process on-going costs would be too expensive.
The typical considerations are:
- An employee stock ownership plan (ESOP) is an employee benefit plan that gives workers ownership interest in the company; this interest takes the form of shares of stock. ESOPs give the sponsoring company—the selling shareholder—and participants various tax benefits, making them qualified plans. Employers often use ESOPs as a corporate-finance strategy to align the interests of their employees with those of their shareholders.
- An ESOP is usually formed to facilitate succession planning in a closely held company by allowing employees the opportunity to buy shares of the corporate stock. ESOPs are set up as trust funds and can be funded by companies putting newly issued shares into them, putting cash in to buy existing company shares, or borrowing money through the entity to buy company shares. ESOPs are used by companies of all sizes, including a number of large publicly traded corporations.
- An annual business valuation provided by a third party is typically required to set the price of each share.
Exit Option Summary
Most options take 6-9 months and have specific pros and cons.
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