Best practices in paying equity investors?

searcher profile

April 19, 2024

by a searcher from University of Texas at Austin in Dallas, TX, USA

I have found a business type that is ripe for rollup in my geographic region in the $1-2M range. Ideally, I will make this first acqusition, become an expert in the industry/business, and acquire 3-10 more similar businesses over the next 10 years. However, I will likely need ~15-20% equity investment for this first deal as I don't have immense amounts of personal capital. I could probably put in ~$50k easily but would be potentially stretching it beyond that.

I have a fairly clear view on how the monthly debt payments would affect cash flow/liquidity. However, if I were to raise 200-400k from investors, what is the typical way of paying returns?

I know it depends on the deal, but I'm looking to understand the menu of options. Thank you all for the input!

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commentor profile
Reply by an investor
from McGill University in San Diego, CA, USA
It depends on the expected returns and risk of the deal. If an investor is ponying up 10% of the deal, that investment will likely get stepped up###-###-#### % (to make the returns compelling), and you will likely be paying a 10-12% annual preferred rate on that capital.

You might find Sam Rosati's self funded model to be useful: https://docs.google.com/spreadsheets/d/1SW9Q3NMpzwy0mrQEHuHuGtIH5LcNtVrla_1NIItb2RE/edit#gid=###-###-####
commentor profile
Reply by a professional
from West Chester University of Pennsylvania in Cochranville, PA 19330, USA
I raised $300k. We have a 10% divided, plus an annual true up and pay out. I can buy them out in 5 years at an agreed multiple
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