Dividend expected by investors?

November 28, 2020

by an investor from New York University in St. Louis Metropolitan Area, USA

If I acquire a U.S. business using no debt, just equity (from my savings, friends & family, outside investors), what % preferred annual dividend would investors expect?

What total annual return would they expect? Would they want me to sell the business in 3 to 5 years so they can realize the return on their investment? What if the business hasn't increased enough in value by the end of that period to provide the total return they wanted?

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Reply by a searcher
from Universidad Internacional del Ecuador in Cuenca, Ecuador

Search fund investors will look for a searcher and opportunity that can generate upwards of 25% annual return for them, and a typical search fund structure (preferred stock, IRR hurdles, etc). However, if your source of funds are friends and family, you have infinite ways of presenting a potential deal to them and in VERY different terms to what the search fund community are used to. It all depends on what's appealing to your network of friends and family and what their motivations are for inveting in you (is it because they think you can double their money in 3 years, or is it becasue they want to support you in your endeavor?). The answer to that question - and to your expectations about what type of growth you can generate in that business (steady slow growth vs rapid growth) - should guide your proposition to your invetors: they may want to have equity in the company or they may be more comfortable giving you a loan and expecting a fixed amount check every month.

Reply by an investor
from University of California, Berkeley in San Francisco Bay Area, CA, USA

The way it works is that you commit to paying investors a guaranteed or "preferred" annual return typically in the 8-10% range. Whether this return is paid in cash or accrues is up to negotiations. That being said, most investors are looking for returns in the 20-35% per year range. To successfully raise money from search fund investors, you will need to show a reasonable financial model that shows returns in that range, however these returns are not guaranteed. When you exit or re-cap the company in the future, the investors will get their money back plus the preferred return before you get anything. In traditional search deals, there are also additional IRR based hurdle tiers, so you don't participate in the gains unless the investor first gets a 15-25% return (this is not market for self-funded deals). If there is not enough money left to make investors whole then you get nothing, but investors don't have any recourse beyond payment preference in the waterfall.

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