One of the current "exit" strategies that is often considered is a recapitalization (recap). The basic program is a profitable company borrowing against the cash flows by securing a loan from a senior lender. Of course, the borrowing assumes that there is little or no debt on the books. The simplified example involves no sale of equity; it provides the owner(s) a means to remove some cash for a business loan that may be personally guaranteed.
Other forms of recaps include:
- Management buyout (MBO) using the cash flow as leverage to purchase equity from the owner(s). Some form of debt is usually included in the funding package.
- ESOP, employee stock ownership plan. The plan provides for employee purchases of company equity over time. The owner(s) arranges the purchase of his shares via a lender loan to the company, supported and repaid by company cash flows.
- An investor group (a la private equity) buys a minority stake in the business. Usually includes an agreement to acquire a majority of common stock over a short period of time, say 3 to 5 years.
- Company arranges a plan to buyout minority shareholders. Shares are usually acquired as treasury stock, and removed from the amount of issued and outstanding common stock. One impetus for this buyback is a public company reverts to being private (going private). Another reason for the buyout may be to remove disgruntled shareholders.