Model/guidance to assess whether to raise investor $ for self funded search

September 12, 2024

by a searcher from Northwestern University - Kellogg School of Management in Houston, TX, USA

I'm early in the self-funded search process (planning to go the ~90% SBA route). I'm trying to think through the financial trade-offs of fully self-funding the down payment on a smaller deal vs doing a larger deal and raising some investor $ for the equity down payment.

Anyone have any sort of excel model template or guidance on how to to think through this decision? I'm particularly trying to figure out the best way to model out the "raise money for a larger deal" portion of this...assuming typical "market" terms from investors

I understand there's other non-financial considerations as well, which I am definitely wanting to consider. Feel free to chime in if you have anything to add there, too! Specially on how to think about risk trade-offs

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Reply by a searcher
from INSEAD in San Francisco, CA, USA

One thing I did that was helpful was to separate out the return on my money from my time / sweat equity.. Model out what it takes (leverage, risk, growth) to achieve a 30% IRR on your money with no investors then separately see what your return on sweat equity is. Then do the same math with investors and you'll have a sense of what the parameters need to be to make sense for both scenarios. If you are looking for market equity investor terms: 8-12% preferred return, ###-###-#### step up, and an overall IRR of 30-35% are what I've seen but other people probably have more experience than me.

I agree with ^redacted‌ that bigger deals often have more infrastructure and less owner involvement so if it's between a really small deal that you could take down on your own vs. something bigger with investors, it might make more sense to go big. But all things equal I'd go through the exercise I suggested above.

Reply by a searcher
from University of Florida in Virginia, USA

Thanks Luke for tagging me. I think it comes down to what you can afford in a downpayment. At a minimum, you need 10-15% cash to close a deal financed through the SBA, and more if you use a conventional loan for a company with >$2M EBITDA. Then, the rest will be financed through some combination of the loan and a negotiated seller note. If you want a bigger company where you cant afford the full downpayment and are ok with taking investor money to close the gap, giving up equity, and the SDE meets your lifestyle requirements, then I would do it. If you want retain 100% equity and control and dont want to pay an investor alot of money compared to what they actually put down, then buy a smaller company without investors where you can afford the downpayment.

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