Self-contributed search capital step-up?

searcher profile

December 12, 2023

by a searcher from Temple University - The Fox School of Business

Hey all,



Two questions, assuming I'm conducting a traditional paid search as solo searcher and eventually acquiring an $8mm annual revenue service business in PA/DE/NJ:

1. If I contribute capital to my own search, will my investment also get stepped up upon acquisition like the other pre-acquisition search capital investors?

  1. Does salary post-acquisition as the CEO change from salary pre-acquisition while searching? Generally, how does CEO compensation work (i.e. ballpark market terms)?

    Thanks in advance,

    Matt
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commentor profile
Reply by an intermediary
from Babson College in Boston, MA, USA
Full disclosure, I don’t have experience with this topic directly but here’s my take conceptually. Take a step back and think through what the step up does for outside investors. The point is you’re (as searcher and entrepreneur) giving a preferred stake in the business to attract outside money. In order to accomplish this, you sacrifice your own equity interest to give it to the investor.
So now turn the focus back to your self funded question, if you’re receiving a step up, who is sacrificing the equity? An outside investor is likely not inclined to provide you that same benefit as it diminishes their preferred return.
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Reply by a searcher
from Temple University
Thanks Marc! I did a little more research on the topic, too. Seems just like you said, the point of the step-up is to attract early capital. From a capitalization point of view, someone else mentioned that it's less efficient to fill the cap table with investors that won't actually contribute to the acquisition, so for instance, if someone wanted to help a family member with a slice of the pie early-on, the expectation is that that person has the capital to contribute to the eventual acquisition on a pro rata basis. This makes sense to me, drawing on my experience in the syndicated debt markets.
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