Self Funded Capital Structure Question

by a searcher from The University of North Carolina at Chapel Hill - Kenan-Flagler Business School

4 years ago

I'm a self funded searcher trying to outline the capital structure of a potential deal. I don't want want to take on debt in this uncertain times (I'm afraid to get crushed under the weight of debt if an economic downturn to this particular industry), so I have seller financing and equity available. How do I decide how much equity I should keep? I realize potential investors will push back and negotiate their own specific terms, but where do I start? Do I start north of 50% just because I self funded? 

Any advice is greatly appreciated.
Austin

2 likes
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12 comments

searcher from INSEAD

Interested in how this ended

9 months ago | like reply | 0 likes

investor from University of Southern California - Marshall School of Business

More debt means more risk, but also more return. That’s why it’s called leverage! If you bought a biz with 90% debt on a 10 year term, paid it off, and sold the biz for exactly what you paid, you’d get something close to 35% IRR. If it was 100% equity in that same scenario, IRR is zero. I’d start by seeing how much debt you need to take to achieve 35% IRR for equity holders. This would depend on your value creation plan for the business. Also, don’t rely on multiple expansion as your primary path to IRR. The deal needs to pencil this lever pulled.

10 months ago | like reply | 0 likes

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