Sometimes business owners looking to grow lack the financial means to do so, which draws many capital seekers to private equity. Securing that funding, and selling the majority stake required to get it, puts owners in an unfamiliar position, one in which the buck no longer stops with them.

“Running a business is an issue of control,” says Richard L.N. Weaver, national director – Wealth Strategies group at AB Bernstein. “You're going to cede some control in a transaction. So how do you do that?”

Owners, in coming to terms with the reality of giving up majority control through a recapitalization, need to consider who they’ll be working with, as well as whether the deal will give the business, and its owner, enough money to achieve the goals that led them to seek capital in the first place.

“People say, ‘I like the multiples of the deal very much. I need more. More why? Because my friend down the street got some more money for their deal,’” Weaver says. “But the question is, What is enough? And I think it's very critical.”

At last year’s Philadelphia Dealmakers Conference, Weaver spoke about what to consider when pursuing recapitalization, including the importance of defining goals and choosing the right private equity partner.


One chance

Private equity is hungry for deals, and that’s led firms, hunting for places to put their money to work, to reach deeper into markets for opportunities. And small business owners who never used to hear from private equity firms are getting unexpected exploratory calls.

“We'll have a client that calls and says, ‘You're not going to believe it. I never thought the private equity world would even look at my business, but they're calling me and I hear all these great things about multiples,’” Weaver says. “But the realistic part of it is, depending on size, depending on whether it's being rolled up in a platform, I think there's a lot of confusion on what's happening in the world when they have a smaller business.”

Recapitalization, in most situations, means the private equity firm will take a majority share, so picking the right private equity partner is very important.

“A lot of people go into these deals and they take the best price they see,” Weaver says. “But it might not be the right partner, and suddenly there are changes. Then we have deals that are just not going through and it gets to be a real mess.”

When Weaver works with business owners who’ve invited a recapitalization, rolled over equity is an area that he says should get a lot of attention. He suggests that owners should assume that soon after taking the rollover, the economy tanks and the business struggles, making it unlikely that the rest of the company could ever be sold.

“Are you OK with the money that you've taken out initially?” Weaver asked. “That's very important.”


Personal goals

The personal wealth side of a deal takes planning in order for an owner to realize his or her post-transaction goals. With the ownership of fewer businesses transitioning to the family’s next generation, it’s important to consider how the proceeds from a recap, or a sale, and that should be done well in advance of a transaction for the owner’s goals to be realized.

“Too often, we have someone come up and say, ‘I'm about to sign a deal tomorrow, and I know there are things I can do to reduce taxes, and I'm thinking about charity,’” he says. “But it’s kind of late then.”

Working ahead of the deal allows an owner to do things that can save money, such as transferring private shares to charity to avoid taxation. But often those moves aren’t made.

“Why is it not done? Because it's a control issue again,” Weaver says. “People say, ‘I don't know if I want to give away shares now because I might need the money.’ Good planning in advance says, for you as an individual, for your family, you'll need a certain amount, $15 million to $20 million, to secure your lifestyle for the rest of your life. Then all the rest of that is going to be surplus capital. And it's that money that you have to think about potentially transferring out of your estate.”

He says a great time to do that is prior to a deal.

“But people don't think about it because there are a lot of things going on here,” he says. “I highly advise you to remember the personal aspect — the income tax, estate tax.”