Self Funded Searcher Terms

searcher profile

February 07, 2024

by a searcher from The University of Chicago - Booth School of Business in Chicago, IL, USA

So there have been a lot of REALLY helpful posts on this topic already and here are two as an example:
https://www.searchfunder.com/post/details-on-typical-self-funded-terms-for-investors
https://www.searchfunder.com/post/ma-monday-buying-a-business-with-0-structuring-w-investors


From what I have gathered, a fairly common structure for equity investors in a self funded searched is a "pref", liquidity preference, and an equity step up. Some more great resources:

https://bentigg.beehiiv.com/p/selffunded-sba-acquisition-structuring-explained https://www.searchfunder.com/post/investor-equity-terms https://twitter.com/Eli_Albrecht/status/1699037830540923390



My question, can someone help me understand the mechanics of a "pref"? Is this just a coupon payment made on their intial investment? Does this have anything to do with the net income of the business? Does anyone have an excel model of an example deal they can share?



Thank you!

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Reply by a searcher
from University of Pennsylvania in Miami, FL, USA
It is fairly simple. A pref is like debt interest.
If there is $3M of pref equity, and a 10% pref coupon, then you would need to pay out $300,000 per year (assuming you did not pay back any of the principal). It has nothing to do with net income unless...if you cant/dont pay, then it will likely PIK and add to the principal. So in the case above, you will have $3.3M of principal and need to pay $330K the following year (10%) .
commentor profile
Reply by a searcher
from The University of Chicago in Chicago, IL, USA
Thanks for the reply!
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