The minority recapitalisation: liquidity without a change of control

A founder who wants liquidity and intends to keep control has one instrument: a minority recapitalisation. The company raises capital or the founder sells part of a holding, cash reaches the founder, and control does not move. The Investment Banking division has completed nine of these since 2022, with an average size of US$17 million and a range from US$6 million to US$38 million. Most sellers were second-generation owners of licensed businesses in the sectors the firm originates in.

The instrument is simple to describe and difficult to price. A minority stake without control trades at a discount to the value of the whole, between 15 and 25 per cent in the transactions the firm has run. Buyers apply that discount because they cannot force a sale, cannot set the dividend and cannot replace management. Founders resist it because the number on the page is lower than the number in their head. The negotiation is really about which of those three disabilities the buyer will pay to have removed.

What removes them is the governance package, and that is where the value sits. The firm negotiates a defined dividend policy, board representation proportionate to the stake, reserved matters covering new debt, related-party transactions and any change to the licensed perimeter, and information rights on a fixed reporting calendar. Reserved matters are the heart of it. A minority holder who can block the four decisions capable of destroying the business does not need control in order to protect the position.

The failure mode of a minority position is having no way out. Every transaction the firm advises carries a defined exit: a put option exercisable between years four and six at a formula price, a drag-along that allows the founder to sell the whole company and take the minority with it, and a tag-along that prevents the founder selling control alone. Where a founder will not grant any of the three, the firm advises the client not to invest and takes no fee for the process it has already run.

The four tests the firm applies to its own capital serve a founder receiving proceeds equally well. The first asks whether the advantage the company holds is structural or temporary. The second asks whether it can be converted, and on what timetable. The third asks whether this is the best available use of the proceeds. The fourth asks what loss the family is prepared to accept. In three of the nine transactions the founder concluded that a full sale within two years was the better outcome, and the firm ran those processes instead.

The firm's own balance sheet takes a position alongside the client in roughly half of these transactions, never above 20 per cent of the equity raised, always on the same terms and at the same price. The Conflicts of Interest policy requires that allocation to be approved before the price is agreed rather than after it. An adviser that also invests has to be able to show which decision came first. The firm shows it with a dated committee minute and nothing else.

Published 2025-01-21 by the Investment Banking division. Research is prepared for eligible counterparties and does not constitute advice.