self funded searcher equity terms?
February 07, 2021
by a searcher from Babson College - F.W. Olin Graduate School in Natick, MA, USA
I'm a self-funded searcher and I wanted to understand more on how I structure and pitch investment terms to potential investors. I understand that generally, the investor gets preferred equity and we searchers want to allow them to get a return better than 25%, but can anyone break it down in more detail for me?
Still working on getting the deal terms right so I can pitch to investors. For example, if I had a deal like this:
-$5 million purchase price at 5x EBITDA
-SBA loan of $2.5 million
-Seller Note of $1.5 million
-Raising cash of $1 million
If a potential investor (friends/family) offered me $100,000, what am I giving them in terms of equity?
from University of California, Berkeley in San Francisco Bay Area, CA, USA
I have looked at many self funded searcher deals as an investor and also raised money as a self-funded searcher myself. My experience is that terms really depend on the amount of equity you are trying to raise. Generally speaking, most investors primarily care about the % ownership they are getting and are less focused on IRRs. This is because (i) IRR projections are highly dependent on your model assumptions, and ii) there is a lot of risk with highly leveraged low EBITDA deals.
Here is a general framework based on my own fundraising experience. Your results may vary depending on deal attractiveness:
- $100k-$500k: Can raise from friends and family. Offering investors 20% + 8% pref is market;
- $500-$1M: You can raise $25k-100k checks by calling a lot of investors from Searchfunder and from wealthy individuals in your professional network. This is a ton of work, but can work up to $1M or so. Terms likely in the 30-60% range after 8-10% Pref;
- $1-$2M: You have to start approaching sophisticated investors who will ask for a much higher share of the upside with downside protection, but you can probably still retain 30-50% with IRR/MOCI hurdle tiers if the deal is very attractive.
- >2M: You will need to talk to small funds and very sophisticated family office investors who are trying to maximize their own economics. Terms will be similar to traditional search fund terms.
in Cleveland, OH, USA