Time to Recapitalize Your Business?

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December 10, 2013

Running your own business often means investing a substantial portion of your personal wealth in it. This can potentially yield big returns, but it also brings some risk: Short of other successful investments, your financial future might be tied to the performance of that business and its industry. Meanwhile, most of your assets might be illiquid.


Some business owners turn to recapitalization to diversify their holdings, gain liquidity, scale back their involvement in the business or even cash out completely, says Elliot Jaffee, Head of Commercial Banking for U.S. Bank. Simply put, recapitalization is a financial transaction where the business’ capital structure is adjusted or supplemented with other forms of financing.


"Every business owner's goals and situation are unique," says Mike Ott, President of The Private Client Reserve.

“If you’re looking to reduce debt, generate liquidity, raise cash for growth or even exit the business, recapitalization might be an option. Your Wealth Management Advisor and Private or Commercial Banker are here to help you identify options to work toward your goals.”


Here are two scenarios in which you might consider a business recapitalization.

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December 10, 2013

1. Take out money for other purposes

If most of your personal wealth is invested in your business, and you’d like more cash to put into your investment portfolio or have on hand for other purposes, a recapitalization might be a good fit.


Retaining business ownership, you could use recapitalization to channel money from the business into other investment vehicles or use the cash for purposes outside the business, like buying a new home. As a shareholder, you typically would receive a dividend from the business in the amount you’d like to take out of the company. You might secure a commercial bank loan or other type of financing.


“With this personal liquidity, you as the owner now have the opportunity to invest in other types of assets. Your wealth that was perhaps entirely in the stock of the business is now more diverse,” Jaffee


says. As always, you need to weigh the risks of your particular investment. Each asset class has its own set of unique risks. Be sure to consult with your investment professional to determine which asset classes are appropriate for your unique situation.


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2. Exit the business or reduce ownership

Alternatively, you might want to exit the business or reduce ownership of it. In this case, an outside investor such as a private equity firm might be brought in to buy all or part of your stake. This strategy involves giving up some or all control over management decisions.


An alternative approach might be to sell ownership to employees in an Employee Stock Ownership Plan (ESOP).

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December 10, 2013

Is Recapitalization Right for You?

When considering recapitalization, it’s important to think about your personal goals, your business goals and other factors like the type and size of your business. For example, certain recapitalization options, such as bringing in a private equity firm as an investor, require you to step back from management of the company. So you’ll want to consider your emotional investment in the business and whether you would be comfortable with this scenario.

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Work with your Wealth Management Advisor, a Private or Commercial Banker and a tax professional to better understand which, if any, recapitalization option might work best for you. “As a business owner, your blood, sweat and tears are tied up in your business,” says Dominic Trader, Wealth Management Consultant for The Private Client Reserve. “We understand and respect that.”


Jaffee adds, “Our Commercial Banking team is ready to engage and dialogue with you about potential recapitalization strategies for your business.”


Please see important information below.

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