Investor Looking for Options

September 21, 2022

by a searcher from Minnesota State University, Mankato - College of Business in Victoria, MN, USA

My business partner and I are going down the ETA path as a growth strategy for our current marketing agency. We have an investor interested in helping us make a strategic acquisition. They have asked us to present a few options for how the investment could be structured.

For background, they recently sold a business and are not interested in being involved in the company's day-to-day operation. Further, the investor is a blue-collar success story and does not want an overly complex structure.

I have spent my career managing small businesses, not sourcing or structuring outside investments. I am looking for advice, templates, and information to get started. I just finished Buy Then Build and started on the HBR Guide to Buying a Small Business so I am starting to speak the ETA language.

A special thank you to Karen Spencer, whom I met last night at a Twin Cities Startup Week event, for encouraging me to post and get engaged on searchfunder.

Reply by a searcher
from Arizona State University in Louisville, KY, USA

If you're buying under the SBA cap, that's probably the way to go. If you have a friendly seller, good company and aggressive bank you can cap your equity needs at 5%. Worst case is 10% cash + 2-4 mo. working capital (working capital fund depending on the bank, deal, PFS of 20%+ equity holders)

Maybe I've been in sales for too long (or am too cynical) but that ask from the investor sounds like a great way to not make a decision... Probably a good idea to tie them down to (in no particular order): 1. Tax concerns; 2. Expected hold time; 3. Liquidity concerns; 4. Actual cash/net worth (nothing like a "sure thing" investor committing $400k when the he actually had $50k in the bank... that was a problem) 5. Hard "pass" criteria based on the deal economics (debt coverage mostly)

Most importantly, what do YOU want?
Also wondering about multiples. Ever since silicon valley types woke up to vertical integration in the media buying space, people have looked to have lost their minds, your thoughts?

Reply by a searcher
from The University of Michigan in São Paulo, State of São Paulo, Brazil

Hi Greg, how are you? I have over 10 years of experience in M&A prior to becoming a searcher and am currently working as an inpendent sponsor in Brazil, where I am from (with one succesful acquisition so far). If you want, reach out to me via e-mail and we can brainstorm some structures, redacted though, the most simples structure if they don't need income / dividend is to value your company and raise the common equity you need with them and dillute the captable in your company, and subsequently do the acquisition (this is very similar to how public companies do it). However, if you prefer, you can use a mezzanine or more sophisticated and complex structures!

Thanks

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