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by a searcher from Murdoch University
in Chicago, IL, USA

1yr ago

Investor returns

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.

1 Like

323 Views

reply by a professional 1yr ago
in Austin, TX, USA

Happy to share how we're working with searchers to standardize the terms we're seeing pencil for the investors on our platform while still maximizing the ownership for the prospective buyer (you). It's a two-way street, you want to adhere to where the market is at while at the same time retain an appropriate percentage of ownership considering you're the one operating and assuming you're also PG'ing the debt.

Feel free to DM me or reach out via email: redacted

reply by a searcher 1yr ago
from Harvard University in Nashville, TN, USA

This is pretty onerous for the operator.

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.