New ‘Un-IPO’ offers best of both worlds - but is it right for you?

Private recap deals inject cash and free owner’s equity - at a price

Many companies need a big chunk of expansion capital but aren’t ready for an IPO. Still others aren’t sexy enough for "vulture" capitalists - but have solid long-term prospects. There’s an alternative some now call an "un-IPO." It lets you get the same kind of equity infusion without incurring the high costs of an IPO or opening your kimono to regulators. This middle-road is called a private recapitalization, and it’s increasingly popular, says John Megrue (SKM), New York merchant bankers.

Lets owners take out cash

Unlike IPO or VC deals, recaps put a chunk of cash in the owners’ hands when the ink dries. (Attractive for those who want to take out cash.) Day-to-day operating control and decisions can remain in the hands of current management, while the new partners offer counsel, support and direction toward agreed-upon goals.

Sticking point: Loss of control

Critics like Bruce Barren, of EMCO Financial, Los Angeles, see loss of control as a huge issue, since current shareholders end up minority shareholders. Barren, who favors ESOPs, says recaps can be sweet if everything goes according to plan. But sour quickly unless you choose the right partner up front. Other keys to success:

a fair valuation, since current owners will end up in the minority

a shared vision among all parties for what the business will become, and

a realistic exit strategy, such as a merger, public offering or another recapitalization.

CFO & Controller Alert
August 10, 1999