What is a recap anyway?

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Thursday, December 20, 2018

HME News asked Bradley Smith, a managing director and partner at Vertess, to explain:

“Instead of buying a whole company, like a strategic investor would, a recapitalization typically involves a legacy owner holding on to a minority percent of the stock in the company, referred to as ‘rolling equity.’

This has two benefits. First, most owners have the majority of their net worth wrapped up in that one company and they don’t want to sell the whole thing and walk away. A recapitalization gives them the ability to sell 80% or 60% or whatever percentage they want, take the money and invest it elsewhere, but still have a seat at the table. Really, still be at the head of the table, running the business.

Second, the owner gets a ‘second bite at the apple,’ meaning when the company sells again in five years, the owner will receive another payout for their minority equity. Typically, this payout is as big as the first exit.”