Help on Self-Funded Search Deal Structures

August 28, 2019

by a searcher from University of Pennsylvania - The Wharton School in Boulder, CO, USA

I'm closing in on a deal and at the point where I'll be discussing the structure with my investor group and bank. How does the structure typically differ in the self-funded model relative to the traditional search? Any examples from self-funded folks on the model/structure they moved forward with?

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Reply by a searcher
from University of Pennsylvania in Miami, FL, USA

Hi Garth - it comes down to what you can negotiate with your investors. It is not unreasonable to get a deal fee and/or fee for an PG you need to provide to a lender that is part of the preferred stack. Above that, it will be a negotiation to get to level where your investors are comfortable with the risk/return profile. Given you have supported your search, i would think you could get better terms than a funded searcher. One way to structure is to tier the returns similar to a funded searcher but with lower thresholds and higher takes for you. i.e.

Investor gets capital + 7% pref

Then...Garth gets 3% deal fee + 3% PG fee with a 7% pref

Then
30% carry up to 15%

40% up to 20%

60% above 20%

it will also be dependent on your long terms goals -do you want to do one deal, or multiple deals? are you trying to "squeeze" the most today vs. build for long term. These are questions only you can answer.

Reply by a professional
from Walsh College of Accountancy and Business Administration in Detroit, MI, USA

Structures should be designed around the facts of the transaction and cover both legal and tax goals. Both self-funded and traditional search structures can look the same in terms of entity types, but the biggest differences are in the terms of the business deal that are generally captured in operating agreements if using a LLC structure (that is taxed as a partnership). Also, self-funded searches allow for the use of an S-Corporation for eligible owners, where traditional search model generally do not because the investor group typically will not meet the requirements to be an S-Corporation. Send me an email and we can set up a call to discuss further. redacted

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