Experience taking on equity investors?
July 11, 2024
by a searcher from University of Akron in Seattle, WA, USA
I own a small business in the fire protection space, which was built by acquiring two smaller local competitors and integrating them. Both of these deals were self funded with personal equity.
I'm now in the very early stages of evaluating an acquisition target that is larger than we are. The target is also in the broader fire protection industry, but not the same niche or market (although both are on the west coast).
In this case there are likely some synergistic opportunities between the two businesses, so with that, the acquisition would have the potential to be accretive. Again, it's early stages so there's very low likelihood of getting anything over the finish line, but it does help illustrate general questions I have about this situation.
1.) I would need to bring on an equity partner to fund this deal, since I don't have the capital to close this deal on my own. Does anyone here have experience bringing on an equity partner to acquire a business that would, at least on some level, integrate with a business you already own?
2.) Would it make sense to pitch the investment as a package deal of the two companies (assuming there is accretive increase from the acquisition)? I'm fine with a smaller % of a bigger pie. Any thoughts on the mechanics here?
I know there are a million different nuances left out here, and that there's no one correct answer here. Just looking for some input from some of the more experienced folks here.
Thanks!
in Montreal, QC, Canada
By raising on a combined basis you can also end up with a bigger portion of the capital since you bring something more to the table (1st deal + experience). From what I have seen, when bringing external capital to buy an additional company, you can define the post-money valuation with a premium compared to the multiple you paid for this given business.
Example: if your first company is valued at 4x and you are paying 4x EBITDA for the second business too, you could raise capital with a 1-2x premium so at 5x-6x EBITDA multiple on a post-money basis limiting dilution for you.
So for a 2M EBITDA combined business, EV = 8M$, assuming 75% debt, equity value is 2M$. If you raise 1M, instead of giving up 50% you could value the deal at 5,5x EBITDA (EV = 11M$), equity value in this instance would be worth 5M$, giving up 20% of the equity (1/5) instead of 50%. The premium varies from a deal to another,
from Georgetown University in New York, NY, USA
Bringing in investors can have all kinds of impact on the deal - good & bad
You want to avoid high maintenance investors who will get in your way and not help
If you can bring in value-add that makes it even better
Given the wide open nature of Search, a lot of different investors out there
I bring my background in PE + M&A so can offer advisory help and strategy as an example. We also have LPs with varying professional experience.
If you can bring in industry experience that can help the most
Especially if the SBA lenders want to see if - or require it due to your lack of industry knowledge (here sounds like you’re okay as previous owner)
But if you raise the capital as “just capital” that can work too!
Tough market to raise in so if you get the cash than take it and start your journey as owner