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The Leveraged Recapitalization is another important liquidity tool for sellers who wish to obtain between 65-85% of the value of their business in cash but still want to own 10-40% of the equity of the company. This option allows the owner to still own a meaningful percentage of the Company yet it helps solve some vexing business issues such as: how to transfer the business from one generation to the next; how to diversify an owners' wealth when much of their net worth is tied up in their businesses; how to attract growth capital; how to resolve differing shareholder objectives; and allowing the buyout of select shareholders.

There is no better measure of a person than what he does when he is absolutely free to choose. -Wilma Askinas

With the leveraged recapitalization (recap) you sell a significant portion, approaching 100%, of your equity to a private equity buyer group versus an outright sale to a strategic buyer. The buyer uses a combination of its own equity (cash) from its investment fund and bank/institutional debt to finance the purchase. You then make a small discounted investment with some of your proceeds, possibly on a tax-free rollover basis, in the equity portion of the new capital structure, retaining between 10 to 40% of the equity. No taxes are due on the rolled over portion until the second liquidity event, two to six years down the road. In addition, the current owners would maintain management control, their customary titles and typical compensation for a senior manager.

In many cases the initial payment you receive AND the "second bite of the apple" you take later can provide an overall value far in excess of what you would achieve if you sold outright to a strategic buyer. As an example, a seller could end up with 90% of the cash value (pre-tax) of the company in the bank and continued ownership of 33% of the company.

Depending on the company's circumstances, there are many different structures that can be created in a recap. One interesting variation is an InHouse Recap.