Self-Funded Investor Market Terms - December 2023

December 19, 2023

by a searcher from State University of New York (SUNY) in Buffalo, NY, USA

Does anyone have a good read on what current market terms are for investor equity in self-funded search deals? Prior to the move in interest rates I had heard a preferred return of 8% and anywhere between 20-40% common ownership depending on how much capital is raised. I assume that preferred return has come up to something like 12%.

Currently working on a small capital raise for a self-funded deal where the searchers will be funding half of the equity need. The other half will come from friends, family, and former colleagues that aren't as plugged in to the searchfund landscape. Trying to make sure the terms are reasonable.

Reply by an investor
from University of Oxford in San Francisco, CA, USA

Last 6m of 2023 pref coupons went from 8 to 10-12%. What's more noticeable is the step-up is now often well north of 2x and deals with 1.5x are really struggling. Also seeing more deals (with larger capital raises) where lead investors are requiring 10>20>30% sponsor equity depending on IRR hurdles.

As for broader terms, see this from an old thread:
2 explanations from Nick & Ben - https://www.searchfunder.com/post/investor-equity-terms. And Tom Diamond's post with https://bentigg.beehiiv.com/p/selffunded-sba-acquisition-structuring-explained & https://twitter.com/Eli_Albrecht/status/1699037830540923390

Reply by a searcher
from University of Calgary in Calgary, AB, Canada

I think 8% is still a good starting point especially if you are putting in 50% of the deal requirementes as that is a good risk blance for the investor. The rate outlook over the next 12 months is heading down so the majority of your investment horizon will be in a lower rate environment and I think investors appreciate that, although getting at least one rate reduction event in the books would probably bolster that position for sure.

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