Chicken or the egg?

November 04, 2024

by a searcher from Peru State College in Lincoln, NE, USA

I’ve recently decided to switch careers and decided ETA is the right choice for me. I have been successful in my current career so if I jump I want to do it right. I have a business that’s relatively passive now so I don’t know that I need a funded search, but I’ll definitely need investors to get the deal.

I’ve already done the small business in the real estate world so I’m ready to jump to a bigger deal and I want to work with private equity.

I’ve been reading everything I can get my hands on to learn the industry and I have two questions:

1. does it make sense to start my search before I have funding for the deal? Do I find the deal then go find investors?

Or will owners not take me seriously unless I have investors backing me to prove I can close?

2. I want to be sure I’m reading the right stuff. Any book recommendations I’ll take!

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Reply by an investor
from New York University in New York, NY, USA

Hi Wade - I've got a bit of a different view. How are you going to raise capital if you don't have a deal to show investors? The typical self-funded searcher will find a deal (usually post LOI though sometimes pre) and then show it to investors. I think you have 3 options to consider###-###-#### look for deals for which you can fund the equity yourself, (2) look for deals for which you can fund a sizable part of the equity (~50%) yourself or (3) look for deals where most of the equity###-###-#### %) will come from investors. I can see the merits of all 3 options. Option 1 is a fine ETA route, but then you miss out on some of the attractiveness of the search fund model, and depending upon your financial circumstances you might not be getting enough of an outcome to make this worthwhile. In all cases you are going to be the one driving this business and you will be putting the personal guarantee on the debt, but in option 1 you are only getting your regular equity return, whereas in options 2 and 3 you are getting enhanced returns because you are getting a return on your equity plus sizable economics from the investors (akin to a PE carry). There are lots of buyers that get deals done under options 2 and 3, though if you are concerned about credibility with sellers / brokers then pursue deals for which you can demonstrate you have liquidity to put 30-50% of the equity on your own. Since it sounds like you are still fairly early in your journey, I suggest sketching out some rough parameters of what a “generic” deal would look like - range of EBITDA, multiples, financing mix (SBA, seller note, equity) - so you can size up what makes sense for you.

Regarding investors - I suggest engaging upfront to understand their expectations so you can factor that into your analysis. ^redacted‌ has made some great posts on this. Some investors only want to chat post-LOI, while others will discuss a deal pre-LOI, and others are happy to chat any time. I'm in the 3rd bucket so feel free to DM me.

In terms of reading the right stuff - well you are on the right website for that!

Reply by a searcher
from University of Cambridge in Cambridge, UK

It would be helpful to understand what you have read so far. Search Funds & Entrepreneurial Acquisitions by Jan Simon are pretty much the bible for ETA. If you are self funding the search (rather than doing a traditional search), you should talk to people who have successfully self funded. Most self funded searchers I have seen get funding only after they get a deal, but they keep investors on board and in contact throughout their search. The perspective is generally that if the deal is good, finding funding is not challenging.

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