Monetizing Private Ownership Value

Business owners of the baby boomer generation face a common frustration today. They have built successful businesses over many years and would like to take some money “off the table” for personal financial security. However, they may not yet be ready to relinquish control of their businesses. A well-structured leveraged recap can enable owners to put cash into their personal bank accounts and preserve the outright sale opportunity for another day.

A leveraged recap cannot rely solely on bank financing. Banks are reluctant to see corporate borrowings transferred to personal use, since this may limit a business's working capital availability. Moreover, additional bank loans usually require the personal guaranty of the majority shareholder, which is inconsistent with the owner’s objective of diversifying personal risk.

The use of long-term subordinated debt ("Mezzanine" loans) as a supplement to bank financing can be the most effective was to monetize ownership value. This is a recognized and appropriate use of Mezzanine proceeds. Moreover, banks view Mezzanine loans as junior capital that strengthen the balance sheet. Mezzanine lenders will not restrict working capital availability and rarely require a personal guaranty.

Owners who are not yet ready to “let go” of their companies to a strategic buyer or private equity firm, but are seeking personal financial security, may find the alternative of a Mezzanine-funded recapitalization to be an interesting option.