Reasonable equity allocation to self-funded searcher?
October 24, 2023
by a searcher in Chicago, IL, USA
Hello All,
Would love folks' opinions on what is reasonable in terms of self-funded searcher equity allocation:
- current owner to roll a significant amount of equity (20% area) and remain involved in day to day
- looking to have outside equity sources cover the majority (but not all) of the cash equity (happy to have a preferred equity situation for this group)
- debt ideally would come w/o a PG
I understand that a large common equity ask here might be a reach (especially w/o PG on debt) but thought considering the deal risk I am taking on and for putting deal together that something substantial might be possible. I appreciate your feedback and it will be helpful in going to equity sources for an initial ask. Thank you!
from University of California, Berkeley in San Francisco Bay Area, CA, USA
from University of Tennessee in Nashville, TN, USA
Self-Funded Searchers do the following:
1. Source the opportunity
2. Negotiate favorable price and terms
3. Locate lenders
4. Procure term sheets
5. Conduct direct diligence
6. Pay outside providers for diligence and eat the broken deal cost expenses
7. Pay attorney's fees (sometimes upfront) for fund set-up and transaction expenses
8. Create business plans, decks, forecasts and the content for PPMs
9. Provide personal guarantees to lenders for financing, sometimes up to the entirety of their net worth
10. Generally, become the operator of the business and navigate the storm of being a business owner (customers, vendors, employees, lenders, investors, economic expansions/contractions, unexpected events) all while steering the ship in the right direction 365 days out of the year with the expectation that anything less than what was forecast is a failure on the part of the operator.
With the exception of #10, the Self-Funded Searcher is generally not compensated for their time or their service.
Most investors do the following:
1. Provide available capital to projects that interest them
2. Expect a negotiated return.
Some investors acknowledge this imbalance of effort and others don't. It's your choice from whom you choose to accept capital. However, since the pre- and post-closing activity burden falls decisively on the side of the Self-Funded Searcher, that is where the majority of equity should always reside, in my opinion.