Common Equity split between Investor/Sponsor(Operator) in SearchFund

by an investor from Villanova University

3 years ago

All,
  We are looking to invest in an acquisition deal from a search funder who is going to operate. Would like to know what's the typical industry standard for common equity split between Investor(s) and Sponsor(Operator) in searchfund. Is 45/55 (Investor/Sponsor)  unduly favoring the sponsor? Sponsor gets Operator salary also during the lifecycle.

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admin from Massachusetts Institute of Technology - MIT Sloan School of Management

In most cases, if the sponsor has a PG on the deal but the investor does not that means the sponsor should own the debt. The split is then easily calculated on purchase price. If the deal is $5m and the sponsor has taken $4m of personally guaranteed debt, and the investor puts in $1m then the investor owns 20% of the company.

The negotiating points on the $1m of equity from the investor perspective is then less about % ownership and more about position in the capital stack, preferred return rates, dividends requirements, operator salary, etc.

1 year ago | like reply | 0 likes

investor from University of California, Berkeley - Haas School of Business

It depends on the company metrics (growth, EBITDA size, etc), the equity check size and the acquisition multiple. 45/55 could be a good deal or completely off market depending on the specific circumstances.

3 years ago | like reply | 0 likes

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