Eating your cake and keeping it, too: or how leveraged recapitalization can solve a dilemma.

• Author: Scolnik, Glenn
• Position: ADVICE : FINANCIAL

MANY BUSINESS OWNERS who serve as president of their businesses face a thorny dilemma as they "mature". Their financial advisors tell them to diversify; to shift from wealth creation to wealth preservation. They want to enjoy some of the finer things in life: a second home in Naples, perhaps that 42 ft. Grand Banks trawler, etc. The obvious solution is an outright sale of the business.

However, they may feel they are too young to retire and they enjoy running the company Often, they see future growth in the value of the equity and hate to lose out on that appreciation. The perfect solution may well be a leveraged recapitalization or recap. The best way to understand this transaction is by example.

Assume: 1. A company makes $10 million in earnings before interest, taxes, depreciation and amortization ("EBITDA") and has no debt or cash. 2. A reasonable value for the entire company is 5 x EBITDA or $50 million. Of course, it could be higher or lower. 3. The president owns 100 percent of the equity.

Solution: 1. An outside group (e.g., a private equity firm or investment group) arranges for $30 million senior and mezzanine financing and $20 million in new equity ($12 million from outside group and $8 million rollover). This is a typical leveraged recap. 2. The owner/ president roils over $8 million to buy 40 percent of the new equity. 3. The owner/president receives $50 million less $8 million for rollover stock or $42 million in cash.

So how is the owner/ president better off?. He now has $42 million in cash, still owns 40 percent of the equity and now has a partner to help him capture growth opportunities. The partner can also help with tricky management transition issues down the road.

There are two big issues for the owner/president to...