Recapitalization: take cash out and keep a stake in what comes next

What is a recapitalization?

A recapitalization, or recap, changes who owns your company and how it is funded. An investor buys part of your equity. You take cash off the table and keep the rest. Then you keep building, with a partner next to you.

The word has more than one meaning in finance, so be clear on which one you mean. This guide covers the type owners ask about most: a recapitalization where a private equity firm buys a stake in a company the owner still wants to grow.

Ad Astra Equity describes how these deals commonly work. It says a recap has four moving parts: the firm buys a stake for cash, new debt may help fund the purchase, you keep or reinvest equity in the new company, and a new board arrives with the investor.

Owners choose a recap for a few reasons:

• To take cash out after years of risk
• To fund growth or add-on deals without borrowing alone
• To buy out a partner or settle an ownership issue
• To plan for succession while staying involved
• To add a partner with experience, systems and contacts

If you only want a full exit, read how to sell your business to private equity and our overview of business succession and exit options.

What is the difference between a majority and a minority recap?

In a majority recap, the investor buys more than half of your company and takes control. In a minority recap, you sell less than half, keep control and gain a financial partner. The trade is control against cash.

Website Closers states it plainly: “In a majority recapitalization, you sell a majority stake, meaning a 51%+ stake in the company.” And “Minority recaps typically involve selling 20-49% of the company.” Both numbers are one adviser’s working definitions, not legal rules.

The same source says the choice “comes down to one trade: how much control you will give up in exchange for how much cash today.”

Read the full side-by-side in majority vs minority recapitalization.

Capstreet states that its investments are “Primarily majority investments” and that “Entrepreneurs reinvest alongside Capstreet.” It also says it looks for “a tenured team of owners or managers seeking a majority capital partner.” In plain terms, the structure Capstreet describes looks like a majority recap, with owners keeping an investment in the company.

Is a recap a sale?

Yes and no. A recap is a partial sale. You are paid for the part you sell, and you keep equity, so you share in future growth and in a later sale. A full sale pays you for the whole company.

Ad Astra Equity puts it this way: “It is a partial sale. You are paid for the stake you sell and keep equity, so you share in future growth and a later sale.”

That difference matters in three ways:

1. Your money comes in two payments. You get cash at close and a second payout when the company sells again.
2. Your result rides on the next phase. If the business grows in value, your stake grows. If it falls, so does your stake.
3. You may still have a job. Many owners stay on to lead, at least for a time.

Many people call that second payout the second bite of the apple. Bean Kinney describes it this way: “Rollover equity is often described as the founder’s opportunity for a “second bite at the apple.”” Learn how it works in our rollover equity guide.

A real case shows how this can look. In the Capstreet case study on Ontellus, the company wrote that “in late 2019, Aquiline Capital Partners did a majority equity recapitalization with Capstreet and other unit holders rolling over.” The case study carries Capstreet’s required disclosures. It describes what the company did, and it is not a statement about results for any investor.

How much do founders keep?

Third-party advisers give ranges. In a majority recap, one adviser says the founder typically rolls 20% to 40% of equity. In a minority recap, the investor buys 20% to 49%. Your deal may sit outside these ranges.

Parkland Capital Partners writes that in a majority recap “Founder typically rolls 20% to 40% into the new capital structure and continues operating with the new partner.” Capstreet has not published a percentage, so ask any investor for its number early.

Use this table to see how the ranges fit together. The numbers come from the advisers cited in this guide. They are not Capstreet’s terms.

Think about the size of your stake in terms of three questions:

• How much cash do I need today, after taxes and fees?
• How much of the next phase do I want to own?
• How much say do I want over the next sale?

Selling more raises cash and cuts control. Selling less keeps control and trims cash. Run both cases with your adviser. A sound deal still works if the company does worse than planned.

Who controls the board after a recap?

In a majority recap, the investor controls the board. In a minority recap, you keep control but the investor gets protections. Board seats, veto rights and the terms of a later sale decide how much real say you have.

Parkland says, “In majority recaps, board control transfers to the partner, but the founder typically retains 1 or 2 seats and continued operational leadership through formal employment and shareholder agreements.”

Website Closers adds that after a majority recap “You will likely sign an employment agreement and a non-compete.” Read those documents with your lawyer.

Negotiate these points before you sign:

Capstreet’s own writing on life after a deal is a good guide to what to expect. Its post tells founders that “Large capital decisions, executive hires, or strategic pivots no longer sit entirely on your shoulders.” Read more in what to expect after you sell.

What happens to my equity at the next sale?

Your rolled equity is sold along with the investor’s. You are paid your share of the sale price based on your percentage, subject to the deal terms. If the company is worth more, your stake is worth more. If it is worth less, you receive less.

Here is an example. The figures are round numbers for illustration only. They are not a forecast and not a Capstreet result.

For example, suppose an investor buys 70% of your company and you keep 30%. Your stake then rides on the value of the whole company at the next sale. This ignores debt, fees and preferred terms to keep the math simple.

Real deals add debt, preferred equity and incentive pools. Each can change what you receive. Ask your adviser to model a good case, a flat case and a bad case before you sign.

A sale usually comes after a holding period. Parkland says the recap partner exits “typically 5 to 7 years post-investment.” Check any investor’s plan for timing, since your second payout waits on it. See holding period for the term.

How are taxes handled on rolled equity?

Cash at close is generally taxable in the year of the sale. Rolled equity may be tax-deferred if the deal is built the right way. Deferral is not forgiveness, so tax comes due when you sell. Ask your own tax adviser first.

Website Closers explains it this way: “Cash you receive at close is generally taxable in the year of the sale.” It continues, “Deferral is not forgiveness: the tax comes due when you sell the rolled shares.”

Three points to keep in mind:

• The right structure can defer tax on the rolled part. The wrong one can make it taxable at once.
• State taxes add another layer.
• Your adviser should join the process before the letter of intent is signed, not after.

This guide gives general information, not tax or legal advice. Your own tax adviser and lawyer should review your facts.

How is a recap different from a dividend recap?

A dividend recapitalization is a different deal. The company borrows money and pays it to its owners as a dividend. No new owner comes in. A recap with a private equity partner adds a new investor who buys a stake.

Ad Astra Equity explains: “In a dividend recap, the company takes on new debt purely to pay a dividend to its existing owners.” It is the main reason to read the term closely. Two deals can both use the word “recap” and work very differently.

When does a recap beat a full sale?

A recap fits when you want cash now, want to stay involved and believe the company has more growth ahead. A full sale fits when you want a clean exit, or when nobody on your team can lead after you.

Use this checklist.

Parkland says that the recap partner “exits when the next transaction occurs, typically 5 to 7 years post-investment,” so a recap is a long commitment. It also says closing is faster than a typical sale process: “Recap closing timelines typically run 3 to 6 months from LOI.” That is one adviser’s view, not a Capstreet commitment.

Compare the full-sale route in private equity vs strategic buyer. If a buy-and-build plan is part of your story, read about buy and build strategy too.

How do I start a conversation with Capstreet?

Read our deal criteria first. Capstreet looks for “entrepreneur-owned businesses services companies” with “$3 to $15 million of EBITDA.” If that sounds like your company, start with a confidential conversation. You can reach us by phone or email.

Before you call, gather:

1. A short history of the company and your goals
2. Your last three years of revenue and profit
3. A view of your team, and who could run the company day to day
4. What you want your role to be after a deal
5. Your tax adviser and lawyer, so they can join early

Capstreet is a Houston private equity firm founded in 1990, with “30+ Years” of experience, “50+ Platform Acquisitions” and “200+ Add-on Acquisitions.” Those are its own published figures, not a promise about your deal. A first call is a chance to ask how we work with founders, and for us to hear your story.

Next step

Read the deal criteria page to see whether your company fits. Then ask for a confidential conversation at Contact, by phone at 713-332-2700 or by email at connect@capstreet.com.