when is the right time to raise equity?

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November 01, 2022

by a searcher from Pennsylvania State University in Philadelphia, PA, USA

Do any self-funded searches have a perspective on when is the best time to raise equity? I've been thinking of getting a deal under LOI and then going to market to raise the capital. But often bankers are asking about my sources of capital when I'm trying to enter a process for a $2m+ EBITDA business. Having the commitment upfront would certainly help with credibility and at times seems to be a gating item to enter the process. Would love to hear your thoughts and would also love to connect with any investors.

Thanks!

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Reply by a searcher
from Harvard University in Boston, MA, USA
Re: Investors, Make contact but you don't need commitment up front. Ask directly what check size they'd want to write and give them a sense of the terms you'd offer and get their reaction (you're qualifying THEM, too). Keep in touch as you hunt for your deal and always accept intros to other potential investors as you continue your search. Make sure your interested potential investor pool's dollars total 4-10x what you expect to need on the deal. Finalize the cap table once you have the LOI signed. Idea is to not ask investors to get comfortable with you AND your deal at the same time.

Re: Bankers, FWIW, in my experience it's tough to get $2MM+ EBITDA deals as a SF Searcher because you will have lower middle-market PE and Strategic competition that pays higher multiples and more cash at closing than you can afford to offer. Even proprietary deals at this scale have sellers who are sophisticated enough to shop around, more often than not. Tell the bankers the truth: You have preliminary commitments from investors, but your LPs won't sign and open themselves up to some Banker's scrutiny until they know the deal and the terms. That will mean you miss some deals, which is a good thing, because the sellers or intermediaries who insist on seeing your balance sheet won't sell to searchers anyway. Don't waste your time.
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Reply by a searcher
from Harvard University in Salt Lake City, UT, USA
I wouldn’t let the fact you don’t have committed equity stop you from signing an LOI on what you believe to be a good deal. If you don’t get the LOI, it’s possible the owner has decided to sell and someone else will acquire the business. Extend the LOI date a bit—instead of 90 or 100 days, go with 120 and explain that it has to do with your capacity to diligence as a buyer with a smaller shop (this shouldn’t be a **ding** against you)… and that the extended time has nothing to do with funding availability.
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