Investor returns
June 23, 2024
by a searcher in Chicago, IL, USA
What is a common structure for the return of capital to a private investor after an acquisition?
I have an investor who is interested in giving me 20% of the purchase price I require to close my first transaction and he's asked me to suggest some terms. He said that he wants 50% of the company's equity but is open to other terms regarding returning his capital.
Should all the cash distributions go to paying him back for his 20% before I receive any distributions? Or would that be too much? What would a fair return be?
Thank you.
from Harvard University in Nashville, TN, USA
Pref hurdle of 8-12% with *max* step-up of 2x (e.g. 20% of capital for 40% of equity) as opposed to 2.5x you're giving up.
The pref hurdle is a protection for investors to make sure they get made whole before you make money, while the step-up is the investor's compensation for putting up the required equity used for leverage for a relatively risky asset.
As ^redacted has mentioned, most investors should be more than happy with 30% IRR (whether you deliver is another question).
Re: cash flow - As the operator, you should come up with a strong perspective on free cash flow. Whether you decide is to take all of it and reinvest it into the business to grow it or distribute all of it to the shareholders, you and your investors need to get on the same page on this beforehand.
Quick heuristic rule of thumb is to ask yourself if you think you can get more than $1.30 FCF back for every $1 of reinvestment into the company. If so, you should strongly consider Option 1.
from University of Oxford in Austin, TX, USA
Most investors are going to look through the lens of MOIC and IRR. If you can deliver IRR around 30% or more then you're going to have ample investor interest.
Typical deal structure is going to have a waterfall distribution model - 8% preferred return and return of capital to investors, then a catch up for you, finally pro-rata for everything else.