Market Terms for $40m+ Equity Checks ($7m+ EBITDA)

June 13, 2022

by a searcher from Massachusetts Institute of Technology in New York, NY, USA

I'm looking at a deal that could require $40m+ of equity from LPs/investors (I'd put in some personal cash, but not meaningful given size of transaction). Have an engaged Seller, but still in very preliminary stages of DD, and closing wouldn't occur until end of calendar###-###-#### The deal would come with a management team and I'd be involved, but not running day-to-day

Curious to hear hear what folks have seen for economics to the searcher in similar situations - (a) would imagine the traditional 2/20 wouldn't work here? (b) I've heard of others receiving 10-15% of the equity for similar transactions + ~$150k annual mgmt fee, but I don't appreciate the nuances (vesting schedule, how about for a partnered search, hurdles, liquidation preference, etc.)?

What are the typical hurdles for LPs that you'd see before you are "in-the-money"? 8% preferred return?

Where are the best pools of capital to tap to raise the $40m+ (family offices, high net work individuals, search investors, etc.)?

Thank you

Reply by a searcher
in Redondo Beach, CA, USA

Independent Sponsor for sure. In general you should get 1-3% of acquisition fee, 5 % if its an off market fair valuation. You can choose to roll this fee in as equity. Additionally, your Equity should come in thirds up to 25% max: 1/3 up front, 1/3 if company hits IRR hurdles, and 1/3 on exit. "Traditionally" how it works. However PE or Family office who will be your fastest path to raising this kind of capital may not love this structure when first presented. If you syndicate (multiple individual investors) this raise out, your more likely to have better control of your structure. I have also heard of $150k management fee annual, but you need to be bringing unique value or again have locked a fair market deal under LOI before investors get involved. Happy to talk through it, I ran through this process previously, but we ultimately lost the deal as the seller pivoted.

Reply by an investor
from University of Pennsylvania in St. Louis, MO, USA

This deal size is large enough to attract PE interest and there are several pools of capital that would consider the opportunity. As for specific terms, much of what you're able to negotiate as the independent sponsor on this deal depends on what you bring to the table. Having a deal under letter is an important element but it's unlikely to get you (in my opinion) much in the way of equity ownership outright unless you bring some relevant operating experience, management team/resources, industry knowledge/relationships, etc. Absent any of those attributes, you are more likely to get (a) some portion of carried interest only after the investors get repaid in full, and (b) perhaps some portion of the management fee. Shoot me a note if you'd like to discuss in greater detail.

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