transition from self-funded search fund to HoldCo - seeking advice
August 26, 2024
by a searcher from University of Pennsylvania - The Wharton School in Amsterdam, Netherlands
After buying my first company with no outside funds, I am looking for follow-on acquisitions in the travel (tech) space. Can anyone offer advice on the transaction economics to transition from a single, wholly owned operating company to a HoldCo with multiple companies and external investors?
Some concrete questions: - how to value the contribution of the existing company to the HoldCo? - should the HoldCo charge investment management fees to OpCo’s or to investors going forward? And what levels? (ie 2% on contributed capital) - What carried interest should apply? (ie 20%) - should the search for additional targets be financed through the HoldCo?
Assuming that most of the search and acquisition financing is done via equity investors, it seems like a transition to HoldCo would make typical micro-PE economics apply.
Any thoughts? Thanks in advance!
from Harvard University in Nashville, TN, USA
From the convos I've had, there are a couple different options.
Option 1: Platform-and-add-on play where you can use your original portco as the platform to acquire others. You might not need other LPs and share economics with them, if you go this way, depending on how much you want to acquire.
It may be worth your time to question your assumption that search & financing acquisitions always requires equity investors
Option 2: Master HoldCo with Series of LLC's underneath. There are diff flavors of this where you have a separate fund from which you can house your LPs and you run it as GP. The complication here is that you may want to keep most of your economics from your 1st acq. I'd imagine that LPs would want that asset to be a part of Master HoldCo as an enticing reason to join the fund. It's very similar to an angel investor willing to house their best investment in a new VC fund that they want to raise.
Each of these options has their own answers to your questions.
I'm finding there are diff variations on each option.
If you want to learn with me as I'm also figuring this out, would love to connect. I'm looking to find others who can teach me as well. Ping me at redacted
from University of Utah in Salt Lake City, UT, USA
This seems easiest to me and what I do with my multifamily real estate syndications. Why wrap in a company you own 100% into a company where you will. only own 20% or so? Just keep them separate.
The only messy part I could see is if you want to bring accounting and marketing all "in-house" over all the companies. But this can be easily separated by just charging a pro-rata management fee's for these services for each company they provide this for.
I would just go find another company to buy and then once under LOI market to investors/PE a
5-10% EBITDA management fee
20% of all profits with a 2.0x or better, then maybe a 30% waterfall after a 2.5 or 3.0x for anything above that gain
1-2% acquisitions fee of the purchase price
Reimbursement of any spent due diligence fees you spent out of pocket.
All of this just for this deal alone then you can adjust terms as you buy your 3rd and 4th deal.