Self funded vs. Funded Economic Returns / Models for Searchers

searcher profile

December 07, 2019

by a searcher from Columbia University - Columbia Business School in Los Angeles, CA, USA

I've been considering whether to pursue a self funded search or a funded search (or search at all) and believe I largely understand the qualitative pros and cons. I'm trying to get a better sense of the economics for the searcher of the two models in a typical deal size for a funded vs. self funded search. I understand the general structure of a funded model (i.e. 30% incentive units vesting in 3 stages) but was wondering if anyone had done any math or a very high level model comparing the two options and looked at both as a solo searcher vs. a partner search.
Thanks!

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commentor profile
Reply by a searcher
from Harvard University in Boston, MA, USA
Have done some modelling, and there are infinite scenarios, but if you take the following:

Self-Funded: 1.1M EBITDA purchased for 5M, with 1.25 financed by investors. Assume carry is split 70/30 searcher/investor. Grow EBITDA 5% annually, sell after 6 years for same multiple, searcher gets $6.4M in cash flows from sale and cashflows from prior years (excluding salary), investor gets $4.3M.

Funded: $2.2M EBITDA purchased for $16M, with $9.3M financed by investors. Assume carry is split 20/80 searcher/investor. Grow EBITDA at same rate of 5% as in self-funded scenario, and also sell after 6 years for same multiple. Searcher's cash flows will be $4M (all from carry, no salary included), and investor's cash flows will be $26.3M.

Assumed 8% pref and 35% minimum distribution in both scenarios. So clearly with 5% growth, self-funded model is more financially attractive. Funded model requires more growth to unlock additional carry. If I adjust growth to 15% in both scenarios, and change carry in the Funded scenario from 20/80 to 30/70 searcher/investor (in this scenario, investor's IRR is 27%), then both payouts to the searcher are approximately even: 12.2M in self-funded, and 12.5M in funded. But the cash flows begin rolling in to the searcher faster in the self-funded scenario, whereas in the funded one all come in only at sale of the company.
commentor profile
Reply by a searcher
from The University of Chicago in Dallas, TX, USA
The biggest advantage to the self-funded searches is you'll have a much better chance of actually closing a deal. In other words, economics of closed/exited deals would have a survivorship bias in favor of traditional search (and even there I think the numbers aren't as good). The economics of the traditional search are such that only a large acquisition really makes sense for the searcher. There are a lot of smaller deals with great valuations that you can find if you're willing to bet on yourself.
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