Know the Difference: Growth Capital, Majority Recap, or Full Buyout
If you're thinking about selling your company, now or in the future, there are a few terms you need to know to find the right buyer. And the tricky part is that each of these firm types are broadly called private equity, so it gets even more confusing.
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If you’re considering selling your company, it’s important to understand the different types of private equity firms that exist. Private equity firms are broadly categorized into three types: growth capital, majority recapitalization, and full buyout. In this video, Kirk Michie from Candor Advisors discusses the critical importance of understanding the players and components of private equity. As a founder, it’s essential to know the difference between private equity firms that have funds and those that still have to raise money deal by deal. You’ll also learn about independent sponsors and search funds, and the potential due diligence issues and closing risks associated with them.
One of the most important distinctions to understand is between private equity firms that focus on buyouts or majority recapitalization transactions. These firms buy the majority of your company, and you either stay along in a passive role or receive some part of the proceeds based on future performance. Alternatively, some part of the proceeds gets paid down the line when the buyer of your company sells it to somebody else.Below are more details about each type:
Growth Capital:
Growth capital is typically invested to foster growth, possibly out of a stagnant or troubled financial situation, for the target company. Companies usually issue new equity to obtain growth capital, which is why it’s also known as “equity financing”. This type of investment is usually made when a company has big plans, such as an acquisition, a new building, or other big capital expenditures. Growth capital investors usually take a minority stake in the company.
Majority Recapitalization:
Majority recapitalization allows you to sell a portion of your business to a private equity group (PEG) while still owning a minority of it. PEGs may offer to do a majority recap if they want to invest in your business while valuing your expertise, leadership, or strategic vision. Majority recapitalization transactions are typically used by private equity firms that focus on buyouts or majority recapitalization transactions . These firms buy the majority of your company, and you either stay along in a passive role or receive some part of the proceeds based on future performance. Alternatively, some part of the proceeds gets paid down the line when the buyer of your company sells it to somebody else.
Full Buyout:
Full buyout is a transaction in which a private equity firm acquires 100% ownership of a company . The private equity firm buys the majority control of an existing or mature firm . This arrangement is distinct from venture capital firms that typically invest in young or emerging companies and typically do not obtain majority control . In a full buyout, the private equity firm takes over the management of the company and makes all the decisions.
By understanding the various players and components of private equity, you can make informed decisions when selling your company. This knowledge can help you maximize your profits and ensure that you never run out of money and live well. Remember, it’s important to find the right buyer for your company, and knowing the difference between growth capital, majority recapitalization, and full buyout can help you do just that.
