How did you determine Equity Step-up?
September 16, 2024
by an member from University of Washington in Mount Vernon, WA, USA
Hello all. If you offered an equity step-up for investors to finance a deal, how did you determine a multiple to use?
from McGill University in San Diego, CA, USA
From the investor's perspective, (as a general matter) investing in self funded deals is riskier than investing in traditional search funds. The deals are smaller, there is more leverage, there is no way to get a majority stake in the deal, the CEO has fewer professional investors around them, less money is spent on diligence, and the list goes on. Investors will want to be compensated for that added risk. As Jonah mentioned, an investor in a traditional search will see a 50% step up. It's common for the step up to be at least 50%, for the annual preferred rate to be 8-12%, and for the valuations to be lower than in a traditional SF deal. Those are some of the ways to equilibrate the two opportunity sets.
from University of Michigan in Detroit, MI, USA