Minority Recapitalization

Realize liquidity Needs Without Giving Up Control

 

  1. Uses
  2. Benefits
  3. Alternatives
  4. Partnering with Prudential Capital Group
  5. Structural Characteristics
  6. Investment Focus

A minority recapitalization, also known as a “minority buyout”, is an alternative means of raising capital to generate liquidity. In a minority recapitalization, leverage in the form of senior debt, mezzanine financing and/or preferred equity can be provided to an existing, positive cash-flow generating business. Financing from a minority recapitalization can be used to fund a variety of capital needs, such as payment to shareholders who need partial liquidity or are seeking an exit. A minority recapitalization allows the remaining, active shareholders to maintain majority control of the business, while satisfying the other shareholders' liquidity needs. The company’s future cash flow is then used to repay indebtedness in subsequent years.

 

 

Uses

There are many uses for the capital raised from a minority recapitalization, including one or more of the following:

  • Buy out inactive shareholders
  • Consolidate shareholder ownership
  • Transition majority share from owners to management team
  • Shift ownership from one generation to the next
  • Transfer majority share from owners to employee stock ownership plan, or ESOP
  • A growth event, such as an acquisition or expansion
  • Refinance existing debt

The graphic below reflects the various use of proceeds for minority recapitalizations.

 

 

Benefits

  • Remaining, active shareholders maintain control of the business while satisfying immediate liquidity needs, with minimal dilution
  • Remaining, active shareholders can maximize their ownership position and benefit from future growth
  • Provides a liquidity alternative to a majority recapitalization or outright sale of the business
  • Is an alternative to a less-flexible, all-debt solution, that may not satisfy full liquidity needs
  • Preserves future growth capacity and operational flexibility with a prudent and patient capital structure
  • Can serve as an interim step to an outright sale, allowing the remaining or active shareholders to capture future value created by the growth of the business 

Alternatives

It is common for shareholders to be unfamiliar with minority recapitalizations. When faced with a liquidity need, remaining, active shareholders are often told their only option is a majority recapitalization or outright sale of the business, which may be unattractive for shareholders seeking to maintain control of their business and achieve maximum benefits from future growth.

Another alternative to a minority recapitalization would be an all-debt solution, which is likely to create limitations on future flexibility in the following ways:

  • Maximizing leverage at close, reducing availability on future debt capacity to support growth or operations
  • Higher level of amortization and fixed payments, limiting the company’s ability to utilize cash flow for growth and to pay down senior debt
  • Tighter covenants and restrictions on future growth events or shareholder distributions

By adding a patient layer of junior capital, such as mezzanine debt and/or preferred equity, into the financing structure, the business is able to preserve cash flow available to service operations and future growth needs. Mezzanine debt and preferred equity do not have required amortization and are less dilutive than issuing new common equity.

The charts below illustrate the potential value to existing shareholders in Year 5 of a (i) minority recapitalization versus a (ii) majority recapitalization, and include the cumulative after-tax impact of the cash interest:

 

 

Partnering with Prudential Capital Group

At Prudential Capital Group, we understand that satisfying shareholders can be a pain point for business owners. When there is a large liquidity need, we can act in partnership with the existing management team to facilitate a cash-out with minimal dilution by means of a minority recapitalization. View another minority recapitalization example.

Benefits of partnering with Prudential Capital Group include:

  • Capacity to fund across the capital structure; a one-stop shop with senior debt, mezzanine or subordinated debt and preferred equity
  • Specialty in mezzanine, which is a less dilutive type of capital
  • Supportive, patient, relationship-oriented partner
  • Deep pockets to provide follow-on capital to fund future growth
  • Streamlined due diligence and execution process, ensuring speed and certainty of close
  • Industry agnostic, with deep experience financing manufacturing, service and distribution businesses

 

Structural Characteristics of Junior Capital Provided by Prudential Capital Group

  • Senior debt, mezzanine debt and/or preferred equity
  • Principal repaid after senior debt has been fully amortized
  • Combination of cash coupon and deferred interest
  • Nominal warrants representing minority stake in issuer
  • Ability to provide senior debt alongside junior capital for a seamless, one-stop solution with a single, relationship-oriented capital partner

Investment Focus

  • Middle-market companies with attractive growth prospects and positive cash flow
  • Company revenues between $30 million and $300 million
  • Incumbent management teams and active ownership with an economic stake in the company’s success
  • Ability to provide junior capital investments between $10 million and $100 million in size

 

Interested? We would be happy to discuss how a minority recapitalization could work for you.

CONTACT US >> 

 


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