Recapitalization

The reorganization of a company’s capital structure. Recapitalization is often an exit strategy for founders and leveraged buyout sponsors and can be partial exit where a large dividend is distributed.  It is the financing technique used by companies and management teams to effect a buy-out, share repurchase or dividend. The “new” leveraged company can provide a high return on equity for shareholders if it can manage the higher levels of debt service.  Recapitalizations are commonly funded by acquisition financing lenders as well as equity provider.  The appropriate funding provider to use depends on the value of the Company and cash purchase price or the dividend paid.  Many recapitalizations are funded entirely through an acquisition financing lender, if the cash paid is within the debt capacity of the company. If the cash price paid exceeds the debt capacity, other forms of capital such as structured equity or preferred stock are used. Recapitalizations result in the introduction of new shareholders which requires of a new shareholder’s agreement between the investors and addition of the investors to the board of directors. Recapitalizations can take the form of minority or majority structure. In a minority recapitalization, the new investor usually joins the board but does not have ultimate control.  In a majority recapitalization, the new investor usually purchases greater than 51% of the shares and controls the company.   Founder-owned companies prefer recapitalizations where the owner wants some liquidity but does not want to sell control.  If the Company has a strong valuation and low leverage, an acquisition financing lender can fund a dividend to the owner with minimal share dilution.