Recapitalization: taking money out without selling everything
A recapitalization changes the mix of debt and ownership in your company so you can take cash out while continuing to own part of it. It suits owners who are not finished operating but have too much of their net worth locked in one company. The tradeoff is leverage, governance obligations, or both.
Written and reviewed by Antoine Campbell. Last reviewed .
Owners reach a point where the business is worth more than everything else they own combined, and the risk stops being exciting. A recap converts part of that paper value into cash without ending your involvement.
Two ways to do it
| Debt recapitalization | Equity recapitalization | |
|---|---|---|
| How it works | Borrow against the business or the real estate and distribute proceeds | Sell a stake to a partner who injects capital |
| You keep | One hundred percent of the ownership | A reduced but meaningful ownership stake |
| You take on | Debt service and usually a personal guarantee | A partner with governance rights |
| Best when | Earnings are stable and coverage is comfortable | You want a partner, capital and a path to a later full exit |
How much can actually come out
The ceiling is set by debt service coverage, not by what the business is worth. A lender sizes the loan so that earnings cover the payment with a cushion, then applies advance rates against the collateral. Where real estate is part of the picture, the property leg usually carries more proceeds than the operating leg because the collateral is stronger.
Any party who tells you the amount before seeing your financials is guessing.
What it costs you
- Fixed debt service that must be paid in bad quarters as well as good
- Covenants: coverage tests, reporting, limits on distributions and new debt
- Usually a personal guarantee on the operating leg
- With an equity partner, consent rights over major decisions
- Less cushion for the next downturn or the next big capital need
Recap versus partial sale
A debt recap keeps all of the upside and all of the risk. A partial sale transfers some of both. Owners who are tired of the risk and want a partner in the room usually prefer the partial sale even when the leverage math would have allowed a recap.
What Maurant needs to evaluate this
- Three years of tax returns and trailing twelve month earnings
- Existing debt schedule, covenants and guarantees
- Real estate ownership and current appraised value if known
- Working capital needs through a normal seasonal cycle
- What the cash is for and what you keep operating toward
When Maurant is not the right buyer
- Businesses with volatile or declining earnings that cannot support added debt
- Owners who actually want out and are using a recap to postpone the decision
- Companies already near their coverage limits
Questions owners ask
- Is a recapitalization taxable?
- Debt proceeds are generally not income, but distributions can be taxable depending on your basis and entity type. Model it with your CPA before committing.
- Will I have to personally guarantee it?
- On the operating leg, usually. On a well-covered real estate leg, sometimes not. It is negotiable and worth negotiating.
- Can I recapitalize and sell later?
- Yes, and many owners do. Understand that the debt added now reduces the net proceeds later.
Sources
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