From Search Funder to Independent Sponsor...

January 13, 2023

by a searcher in West Palm Beach, FL, USA

I started a self-funded search fund a little over a year ago, but some of the deals I've been looking at recently are going to need significantly more capital to close.

To that end I am now looking at the independent sponsor model and would love some advice from this community as to the best way to go about it.

I have an off-market deal in an industry that I possess 25 years of operational experience in, who's EBITDA is roughly $8 million a year.

This first target would act as a platform company in order to make additional acquisitions down the road for ancillary services that service the same market.

I would like to find a partner with corporate m&A experience who wants to take a ride on this bus with me.

Thank you in advance for any suggestions from my friends in the search funder community.

Best,

Rob

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Reply by a searcher
from University of Pennsylvania in Philadelphia, PA, USA

If you plan to acquire serially and will likely need additional equity along the way, try to seek investors who are comfortable with writing multiple equity checks (and ideally have in the past).

The last thing you’d want is finding an investor who gets their max exposure on the first tranche and passes for the subsequent raises, leaving you to start from square one for fundraising. It creates extra work for you, and new investors will wonder why the original ones aren’t pitching in more money - “if your existing investors don’t love it, there must be something wrong.”

One way to get around this is if a given investor wants a $1M total exposure, allocate them $500-750k in the first tranche and establish a two-way expectation that they will top up to ~$1M exposure through subsequent equity financing.

Reply by a searcher
from University of Pennsylvania in Charlotte, NC, USA

Thanks, ^redacted‌ for tagging me. Rob, I'd be happy to share some thoughts but could you clarify what you're looking for: an investor for the opportunity you mention? advice on acting as an independent sponsor (please define your interpretation of this term as there are more than a few)? a partner with M&A experience? - and again if you could clarify what this means, that will help you. In the $8mm EBITDA range, you will have plenty of interest from capital providers, but you should be well prepared in your understanding of typical investor terms and in your preparation of a sophisticated investor package. At any rate, congratulations on finding opportunities large and attractive enough to appeal to experienced equity investors.

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