Convertible Pref to fund an acquisition

December 27, 2023

by an investor from McGill University in Toronto, ON, Canada

I'm currently exploring an HVAC deal in Canada and I'm curious to hear about your experiences with investors who offer convertible preferred equity or preferred equity for acquisition funding. Whether it's a perpetual pref or a 5-year pref, are there any standard market terms?

Also, I'd love to connect with searchers / investors who closed a deal in a similar space

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Reply by a professional
from University of Toronto in Toronto, ON, Canada

I agree with ^redacted‌. Notwithstanding that there is a package of 'standard' terms for investor funding, not every business generates sufficient cash flow to achieve the target IRR, to fund the coupon payments on the preferred shares and to create additional enterprise value to support meaningful value for the entrepreneur after the 2x step-up for the investors. You need to assess every deal from the other end, reverse-engineer the result and determine whether the deal is viable on the funding side. If it's not - if there isn't enough left to properly reward you, the acquisition entrepreneur, for all the risk and time/effort/resources that you're putting in - then walk away.

Reply by a professional
from Northern Arizona University in Tucson, AZ, USA

Opinion from the opposite site, before you go offering investors participating preferred, 2X Step up, 8-12% coupon, liquidation rights. 30% IRR, Do the math of what that investors put option equity looks like in 3-5 years to an local HVAC business that grows on average 5-10% per year.

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