The following is paid post from Wiley.

Question

James Bobbins is founder and CEO of Zicky Corp., a private company in which Bobbins has a concentrated single-asset position. Bobbins is considering exiting his stake in three to five years’ time, but at present he is committed to growing the company and does not wish to relinquish overall control of the company. He also values the privacy and authority that comes with the private equity nature of the firm. It is well known that the government is going to increase the taxes applicable to any exit Bobbins makes from his investment in the next year. Given the information above, which of the following strategies would most likely meet the objectives of Bobbins?

A. Sale to a strategic buyer.

B. Initial public offering (IPO).

C. Recapitalization.

Answer: C

A recapitalization will allow Bobbins to sell part of his stake in Zicky without relinquishing total control. This will realize taxes at tax rates today, prior to their increase next year, which is preferable. It will also allow Bobbins to participate in the exit of the private equity firm brought into the company, which will presumably be consistent with the three- to five-year time horizon Bobbins currently has with the firm. A sale to a strategic buyer would not be appropriate since Bobbins would lose control of the company. An IPO would not be appropriate since Bobbins would lose the privacy and authority he values to public scrutiny.