Bolt On Equity Financing: Putting a Price on Losing Control

June 25, 2024

by an investor from University of Puget Sound in Seattle, WA, USA

Background: I now own 100% of my business (platform company acquired in###-###-#### We've closed 2 bolt-on acquisitions since then (one with two companies) simply using cash from ops and/or debt. I'm not ready to hunt for another quite [as we smooth out integrations and get working capital to a more conservative number] but have been kicking around the idea of taking some personal risk (and upside) off the table on my next deal by selling some equity for financing. We also have been building to hold, not sell, so backing out to a 3-year adjusted EBITDA/SDE would be a pain. I also recognize that I like control--a sentiment I'm sure a lot of us share--and this would mean that I'd have someone to whom I'd be beholden. This would also likely mean adjusting my lifestyle (ie. staying at cheaper hotels when traveling for work since it's no longer simply my money, airlines/credit card points, etc).

TLDR Questions:
1. I'm assuming valuations in this scenario would follow a more traditional PE structure where they'd be looking for a ~20% IRR proforma or does someone have a different experience?
2. Does anyone have an experience they could share about bringing on equity investors after being independent for years?

Reply by a professional
from Dartmouth College in Los Angeles, CA, USA

A number of my clients have done this (brought on PE later in the game) and thus I have worked on many of these deals. You are probably looking at giving up more control than you realize if you go the PE route, which may or may not be a good thing. I wouldn't recommend it just for purposes of de-risking, you have to be willing to change the trajectory and exit outlook for the business.

Reply by a professional
in Austin, TX, USA

Our team specifically has been building a platform geared toward democratizing private equity for great operators acquiring small businesses. Generally, we've seen the following terms garner interest from investors: 10-12% pref, 1.5-2.0x step-up, minimum 25% IRR.

Hope this helps!

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