How to Recapitalize Your Business Need cash, but don't want to give up control of operations? You can get the best of both worlds by recapitalizing.

When Kim Wigington began making candles in her spare time, it was a relaxing hobby that allowed her to spend quality time with her mother, Beckey Neal. Soon, however, what started out as a pleasant pastime blossomed into a full-fledged business for the mother-daughter duo, who opened retail store Wicks n' More in 1999 and soon began selling to other retailers.

Immediate success led Neal and Wigington to eventually quit their day jobs to concentrate on the business full time. By 2005, sales of their hand-poured candles had reached $5 million, thanks to distribution in more than 3,000 boutiques and department stores.

Despite their success, mother and daughter found themselves at a crossroads with different long-term visions for the business. Neal, who had previously worked as a registered nurse, was thinking about retirement. And although 36-year-old Wigington was far from retirement, she had concerns of her own. "Over the years, we had grown [our business] to a $5 million company, but we needed additional help," she says. "We needed additional management input. We needed fresh minds to give us good ideas, make changes and take the business to the next level."

After evaluating their options for a year, they settled on a strategy that satisfied both their objectives: recapitalization. Recapitalizing involves selling equity in the company to investors. The owners get a cash infusion but usually retain control of the firm's operations without having to deal with the level of interference they would experience with numerous venture capitalists. Through their recapitalization, Neal and Wigington sold a 57 percent stake to FCS Investments LLC, a private equity firm in Houston that invests in small to midsize firms with annual revenues of $2 million to $12 million. By taking cash out of the business, Neal was able to semi-retire but remain in control of daily business operations with her daughter. "When you start a company and you grow it, you don't want to completely walk out," says Wigington, who remains president of the Mantachie, Mississippi-based company. "We run the business on a day-to-day basis, while FCS supports us on a strategic level. It is a lot better having help. There were two of us--now there are [more]."

In addition to the FCS Investments relationship, Wigington and Neal teamed up with Main Street Capital Partners, a Houston-based investment manager that provides equity capital as well as expertise to small and midsize companies. Main Street owns 18 percent of Wicks n' More.

Though Neal and Wigington sold all but 25 percent, they hope that, with a seasoned management team supporting them, their remaining stake will only get more valuable. Says Wigington, "Hopefully that 25 percent will someday be worth more than what we sold to them initially."

The Next Level
As Wigington and Neal's story illustrates, recapitalization is appealing for a couple of different reasons. Depending on how it's structured, it may offer a business owner more control than other types of financing, such as venture capital, while freeing up cash to invest in operations, buy out a partner or, as in Neal's case, pay for retirement. The private equity firm typically cashes out after five years, often through the sale of the company or when the business brings on another investor.

"[These are for business owners] who say to themselves, 'I'm not ready to retire. I believe that this business has a lot of growth in it. But I don't want to risk the family's entire net worth, and risk what we've built, so I'd like to take some chips off of the table,'" explains Mark Hauser, managing director of FdG Associates, a New York City private equity firm that recapitalizes family-owned firms. He adds that finding a party you feel you can work with to build the business is crucial.

"It's more than just an opportunity for the owner to cash out," says Fred van der Neut, founding partner of FCS. Indeed, for Wicks n' More, less than a year into its recapitalization, vital building blocks for growth are already in place. FCS, whose three founding partners have extensive financial, operational, and sales and marketing experience, quickly identified a number of areas for improvement, from the need for a more sophisticated inventory tracking system and accurate financial projections to greater efficiency in the company's 82,000-square-foot manufacturing facility.

The stepped-up strategic focus is a welcome change, says Wigington. "Before, we were not able to [easily] determine how much inventory we had on hand. We would go to the back of the plant and say, 'Let's go count and see what we have,'" she recalls. "[There were] simple things we hadn't put in place that FCS took a look at and said, 'We need to do this so we're more efficient and have enough stock on store shelves and are ordering things on [a more timely basis].'"

The company also lacked a strategic marketing plan and needed to improve its branding. Until FCS came onboard, the candle-making business relied primarily on print advertising and had no system in place to measure the effectiveness of ads. Since that time, Wicks n' More has broadened its marketing to online advertising and has developed a proc-ess for measuring the success of its promotional activities.

Return on Investment
What does the private equity firm expect in return? Beyond the obvious--a solid return on its investment--it will probably want, for starters, a seat on your board. In addition to meeting with investors at quarterly board meetings, Wigington sees them weekly for management meetings and once a month for financial reviews.

Because of the close working relationship, it's critical that you choose your strategic partner carefully. In fact, Wigington and her mother initially met with three different private equity firms after deciding to recapitalize. They didn't like the first two. "They weren't a good fit," Wigington admits. "And if you're going to have to work with someone, you have to like them."

Although the mother-daughter team immediately clicked with FCS, they still faced a lengthy due-diligence process. Wigington says the amount of paperwork was daunting, but she used the six-month period to carefully evaluate the private equity firm and what it could offer her business. "At the same time they were checking us out, we were checking them out," says Wigington, who also used those months to determine whether FCS had the expertise to grow her company and to see how the deal would affect her close-knit staff. At the end of that due-diligence period, she felt confident that FCS was the right strategic partner.

Also, be prepared for steep recapitalization costs. Wicks n' More paid about $350,000 to the firm that identified investment prospects and helped broker the FCS deal, and another $50,000 in legal fees. Nonetheless, Wigington considers it money well spent: "It's been great taking on investors but still being part of everything and having financial security for our families."

Crystal Detamore-Rodman is a Charlottesville, Virginia, writer who covers the small-business finance market.