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This
is an example of how a recapitalization works. In this
example, the owners will receive 85% of the
company's value in cash up-front and still retain a 33% ownership
interest.
The facts:
- Company
Alpha is worth $30 million.
- Management
is comfortable running the business with debt of $15 million.
- The
company agrees to sell 70% of the equity in the recapitalized company
to a Private Equity Group.
- The
management team will reinvest 33% of the equity on a tax-free basis.
Shareholders will receive $25
million in cash and keep a 33% (tax-free) ownership interest in Company
Alpha. The $25 million may be shared equally among the
shareholders, or some shareholders may be cashed out entirely, with
management receiving more stock.
| Source
of Funds: |
|
|
Debt
|
$15.0
|
|
Private
Equity Fund
|
10.0
|
|
Shareholder
retained equity value
|
5.0
|
|
Total
|
$30.0
|
|
|
|
|
Use
of Funds:
|
|
|
Cash
to Shareholders
|
$25.0
|
|
Shareholder
retained equity value
|
5.0
|
|
Total
|
$30.0
|
|
|
|
|
Ongoing
Ownership:
|
|
|
Private
Equity Group
|
$10.0
|
67%
ownership
|
Shareholder
reinvestment
|
5.0
|
33%
ownership
|
Total
Equity
|
$15.0
|
|
Therefore, the owners
receive 85% of the
company's value in
cash up-front and still retain a 33% ownership interest.
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