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“I sold my business” sounds pretty straight forward, but in reality can take on many different forms.  It can be an interesting exercise to examine these differences so that a business owner can decide which might be right for him or her as they plan their exit.

Majority Recapitalization (Majority Recap)

In this situation, a business owner sells a majority of the existing equity of the business to an investor, but leaves some of his or her ownership in place (known as rolling equity).  This allows an owner to “take some chips off the table” and receive value for the business while remaining involved.  

Reasons Why This Might Be Attractive
  • Cash today (at a good valuation) while remaining in the business
  • Managers stay in place
  • Business generally has available capital post transaction to grow
  • Owner has an opportunity for a second sale at a later date 
Reasons Why This Might Not Be Attractive
  • Owner might not want to continue working
  • Owner might not want a majority partner/boss
  • Owner might not want to keep equity in the business

Minority Recapitalization (Minority Recap)

A minority recap is a lot like a majority recap, but an owner is selling less than 50% of the existing equity in the business.  The owner is taking less equity and turning it into value at the time of sale, but most of the same pros and cons apply.

Raising Growth Capital

The biggest difference between a recapitalization — which involves existing equity — and raising growth capital, is that a business generally issues new equity to obtain growth capital.  As the name implies, companies usually do this when they have big plans — an acquisition, a new building, or other big capital expenditures.  

Reasons Why This Might Be Attractive
  • Owner stays in control of the business
  • Enables the business to grow
  • Debt, or lower cost capital, might not be available
  • Owner has an opportunity for a second sale at a later date 
Reasons Why This Might Not Be Attractive
  • This strategy works best when the business has strong growth opportunities that will create a return on investment for the business
  • There are other, lower cost of capital options

Management Buyout

A management buyout occurs when 100% of the company is sold to another party.  Management is literally “bought out” of the business.  A buyout can occur as either a stock or an asset transaction.  

Reasons Why This Might Be Attractive
  • Owner is able to retire/walk away from the business
  • Enables the business to grow
  • Some buyers will allow the next level of management team to buy equity during the transaction, which can be an efficient way to transition some ownership to the management team
Reasons Why This Might Not Be Attractive
  • Owner is no longer involved in the business
  • Can be very difficult without a strong management team outside of the owner

As you can see, there are many ways to “sell” your business.  The type of sale will depend heavily on the owners objectives, as well as the strengths of the management team and the type of capital needs.  





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