Equity Arbitrage – How & When Should I Disclose?

February 21, 2025
by a searcher in Chicago, IL, USA
Hi SF community, I have an off-market deal I quite like under LOI. I found a Buyer very interested in a quick exit and I negotiated a purchase price about 50% Fair Market Value.
I want to be open and honest in the friends and family round of raising capital, so the first few investors I spoke with (family members) I let them know that the acquisition will be around 50% FMV, but the Investor entrance tier is at 75% FMV. The thought is that through my sourcing and negotiation (sweat equity + minimal out of pocket expenses), I am generating substantive value, so it shouldn't matter to them that I'm getting a better deal (with significant risk mitigation from the low purchase price) – but I'm getting some push back.
As an example, let's say the FMV of a business is $5m, but I'm paying $2.5m. In this example, I'd be selling equity at a $3.75m valuation ($375k = 10% equity). Even at this entrance price, the investors stand to earn 20-30% annual ROI (we're currently rebuilding the P&L for proper add backs).
My question is... Should I be withholding this information to Investors, be abundantly honest, or just understand that friends and family not in the M&A world may not understand that this is more common than not?
Or... Am I totally off base in my thinking?
from The University of Chicago in Stamford, CT, USA
from University of California, Berkeley in Seattle Metropolitan Area, WA, USA