In my experience advising founders of healthcare companies, transaction decisions rarely come down to a single question like "Is now the right time to sell?" More often, the conversation centers on how to create liquidity, reduce personal risk, and still participate meaningfully in the future of a business that has not yet reached its full potential.
A majority recapitalization is one way founders address that combination of goals. It allows them to take liquidity today while remaining invested in the next phase of growth, alongside a capital partner whose role extends well beyond writing a check. In practice, this shift from going at it alone to working with an experienced partner is one of the most meaningful changes founders describe once the transaction is behind them.
At its core, a majority recapitalization (i.e., majority recap) involves selling a controlling stake in the business while retaining meaningful ownership. While formal control shifts to the majority investor, founders typically retain significant operational influence and governance input through board representation and management roles. The founder stays invested and participates in future outcomes, now with additional capital, infrastructure, and operational support in place.
How a Majority Recapitalization Works
A majority recap reshapes the company's capital structure to support where the business is headed next. The transaction typically combines new equity from a financial partner, a measured amount of company-level debt, and rollover equity from the founder.
Rollover equity is central to this structure. It ensures the founder continues to benefit from value creation over time. Any debt is incurred at the company level, not personally, and the debt is structured conservatively to remain serviceable through normal operating cash flow.
The result is a first liquidity event that reduces personal concentration risk and leads to a company better structured for scale, durability, and ultimately long-term value creation.
Why Founders Consider a Majority Recap
Founders tend to explore majority recaps when they are trying to achieve several objectives at once. The common motivations I tend to see most include the following:
- Reducing personal concentration risk while maintaining ownership and influence.
- Accessing capital and operational resources needed to support the next phase of growth.
- Partnering with investors who have experience scaling similar businesses.
- Creating the opportunity to participate in a future liquidity event once the business is larger and lower risk.
For many founders, the appeal of a majority recap lies in realizing value in stages, with flexibility around timing and continued involvement.
Value Creation After the Recapitalization
The most important work often begins after the transaction closes. At that point, the focus shifts from liquidity to building long-term value and preparing the business for a future exit. In healthcare services, valuation outcomes are driven as much by risk reduction as by growth. Buyers place significant weight on how cleanly the business operates, how consistent it is day to day, and how easy it is for buyers to get comfortable and confident during diligence. The post-recap strategy is therefore designed to address the issues that most often slow deals down or create buyer hesitation.
This phase is typically about adding leadership beyond the founder, getting financial reporting and controls to a higher standard, cleaning up areas like documentation and billing, and creating systems that can better support growth. Over time, this work makes the business less dependent on the founder and gives buyers greater confidence in how the company operates and scales.
As this happens, the retained equity starts to look very different from what it was before the transaction. It represents ownership in a business with stronger governance, lower perceived risk, and appeal to a wider range of potential buyers.
Illustrative Example: A $5 Million EBITDA Healthcare Services Company
To illustrate how a majority recapitalization works in practice, consider the following hypothetical example. The purpose of this example is not to forecast results but to illustrate how value can be realized over time as risk is reduced and the business becomes easier to own and operate.
Note: The following scenario is hypothetical and for illustrative purposes only. All projections use conservative assumptions and are not a guarantee of future results. Actual outcomes will vary based on execution, market conditions, and other factors. Consult with qualified financial and tax advisors before making any transaction decisions.
Company Profile
Imagine a founder-led healthcare services company with $25 million in annual revenue, $5 million in EBITDA, and a 20% EBITDA margin. The business has reached meaningful scale but still relies heavily on the founder for oversight and decision-making. The founder wants to take liquidity, reduce personal concentration risk, and remain invested in the company's future growth.
First Transaction Structure
A financial partner acquires a 70% stake at a 6.5x EBITDA multiple, valuing the enterprise at $32.5 million.
Sources of Funds
Note: Debt leverage of 2.5x EBITDA reflects a conservative capital structure typical for founder-led healthcare services businesses. Actual leverage may vary based on lender appetite and business characteristics.
Net Proceeds to Founder (First Transaction)
*Tax estimates are illustrative only and assume combined federal and state capital gains rates. Actual tax liability will depend on individual circumstances, transaction structure, and applicable tax law. Consult a qualified tax advisor.
The founder receives nearly $15 million in after-tax cash at close while retaining 30% ownership in the business. The debt is incurred at the company level at approximately 2.5x EBITDA, a conservative structure that remains comfortably serviceable through normal operating cash flow.
Post-Transaction Value Creation (Years 1 Through 6)
Over the next six years, the business focuses on professionalization and growth:
- Revenue grows at 10% annually.
- EBITDA margins improve from 20% to 26% through operational efficiency.
- Leadership is added to reduce founder dependency.
- Financial reporting, compliance, and clinical workflows are strengthened.
- Debt is fully paid down through operating cash flow.
Projected Financial Performance
Note: Projections assume 10% annual revenue growth, 1% annual margin improvement, and reinvestment of operating cash flow. These assumptions are hypothetical and conservative. Actual results will depend on the successful execution of operational initiatives and market conditions. Actual cash generation will vary based on reinvestment needs, tax rates, and working capital requirements.
Second Transaction (The "Second Bite") in Year 6
The business has become lower risk, easier to diligence, and attractive to a broader buyer universe. A strategic acquirer pays 9.5x EBITDA, reflecting the company's improved scale and reduced risk profile.
Note: The exit multiple of 9.5x represents a conservative estimate for an institutionalized healthcare services platform. Multiple expansion from 6.5x to 9.5x reflects reduced founder dependency, improved compliance and reporting, and broader buyer appeal. Actual exit multiples will depend on market conditions, buyer demand, and company performance at the time of sale.
Exit Valuation
Founder Exit Proceeds
*Assumes 2.5% transaction fees and estimated capital gains taxes on the appreciation above the original rollover equity basis. Actual tax liability will vary. Consult a qualified tax advisor.
Total Value Comparison
Note: This comparison is hypothetical and illustrative. The "full sale today" scenario assumes an immediate 100% sale at the current valuation. The majority recap scenario assumes successful execution over a six-year hold period. Actual outcomes may differ materially based on execution risk, market conditions, and other factors.
Key Takeaways from the Illustrative Example
This hypothetical illustrates several important dynamics:
- Staged liquidity: The founder receives $14.8 million at the first close, which represents meaningful liquidity that reduces personal concentration risk, while remaining invested in future upside.
- Multiple expansion: The exit multiple increases from 6.5x to 9.5x as the business becomes institutionalized, lower risk, and attractive to a broader set of buyers.
- EBITDA growth: Through operational improvements and disciplined growth, EBITDA more than doubles from $5 million to $11.5 million over six years.
- Second bite: The retained 30% equity stake, which was valued at $9.75 million at the first transaction, ultimately generates $29.1 million in net proceeds at exit.
- Total value creation: The recap strategy generates approximately $22.4 million more in total value compared to a full sale today, an increase of over 100%.
Important: These results are hypothetical and assume successful execution of the post-transaction strategy. The recap structure involves holding illiquid equity for an extended period, and there is no guarantee that a second transaction will occur or that valuations will increase. Past performance of similar transactions is not indicative of future results.
The Second Liquidity Event and the Second Bite
A majority recap is best understood as a two-transaction strategy. The first transaction prices the business as it exists today, including its current scale, systems, and reliance on the founder. The period that follows is intentionally focused on building a larger, more durable business that can operate and scale beyond the founder.
When a second transaction occurs, the retained equity reflects that evolution. The business is often lower risk, easier to diligence, and attractive to a wider set of potential, high-value buyers. While outcomes are never guaranteed, this structure allows founders to participate in the value created through professionalization and risk reduction, not just top-line growth.
Majority Recapitalization: Key Risks and Assumptions
A majority recapitalization depends on several assumptions that should be carefully considered:
- Successful execution of operational, compliance, and growth initiatives is critical, as is selecting the right capital partner.
- Regulatory and reimbursement dynamics can shift, particularly in healthcare services.
- Exit timing and valuation depend on market conditions and buyer demand at the time of sale.
- Improved outcomes assume reduced founder dependence and operations that can withstand deeper scrutiny and support continued growth.
- Tax outcomes vary based on individual circumstances, transaction structure, and future policy changes.
These risks can be managed through conservative leverage, disciplined execution, and strong governance, though they cannot be eliminated entirely.
Evaluating Whether a Majority Recap Makes Sense
A majority recapitalization is not the right solution for every founder or every business. When aligned with the right objectives, however, it can be an effective way to create liquidity, reduce risk, and remain invested in long-term value creation.
VERTESS works closely with founders to evaluate whether a majority recapitalization fits their goals, their business, and current market conditions. If you are considering a transaction and want to understand whether this approach makes sense for your situation, reach out and start the conversation.
DISCLAIMER
This article and the illustrative example contained herein are provided for educational and informational purposes only. The hypothetical scenario presented uses conservative assumptions and is not a forecast, projection, or guarantee of future results. All financial figures, multiples, tax estimates, and projected outcomes are illustrative only and will vary based on individual circumstances, transaction structure, market conditions, execution, and numerous other factors. This content does not constitute financial, tax, legal, or investment advice. Readers should consult with qualified professional advisors before making any transaction or investment decisions. Past performance of similar transactions is not indicative of future results. VERTESS makes no representations or warranties regarding the accuracy or completeness of the information presented or the likelihood of achieving similar results.