Recap Buyout

Recap Buyout - Po'ipu Lava Arch Kauai, Hawaii, USA
Recap Buyout

A recap buyout is a buyout transaction that stipulates a mechanism that enables the vendor to buyback the entire company at predefined conditions. A recap buyout is similar to a combination of a buyout and a buyback as exit. In a recap buyout, the conditions of the buyback are stipulated at the buyout while a regular buyback does not clearly envisage these conditions.

These conditions compensate for the preselection of the exit channel, which limits the private equity company’s return potential. Therefore, in the buyout negotiations, the underlying company will be priced conservatively and an exit valuation will be determined at an early stage of the investment.

Ownership buyouts are especially de signed for buyouts in former family businesses (or owner-managed businesses). This buyout type offers the family the possibility to regain control while withdrawing a share of the family wealth from the family business.

In addition, the transaction setup enables a reorganization of the ownership structure (e.g., if ownership is widely dispersed before the buyout or if one family clan or co-owner is to be paid out but the remaining owners cannot aford this payment at the moment of leaving).