Search sweet spots?

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by an investor from University of Oxford
in San Francisco, CA, USA

4yrs ago

Search sweet spots?

What's your sweet spot for purchase price? And for your & investor equity vs debt %'s?

Considering 2 deal levels, using these assumptions:

c.$3m acquisition funded by a $1m personal investment and $2m SBA loan (estimated 4x multiple, 100% equity)
c.$10m deal backed by the $3m and search funds (estimated 6x multiple, 30% personal/loan equity with a 15% step-up)

Running basic numbers based on hopefully conservative 10% growth rates: Deal #1 and# 2 come out even after 5 years. Deal #2 comes out ahead of deal #1 after 10 yrs by 25%

Assumptions can vary but still....not as big a gap as I expected from the very different deals.

Interesting for folks to share thoughts on their preferred deal values & personal/investor/debt %'s. Helpful if you identify if you're commenting from an investor or a searcher perspective, or both.
Thanks for any input.

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reply by a lender 4yrs ago
from Northwestern University in Chicago, IL, USA

Hi David, based on the active searchers I'm currently working with, the priority seems to be keeping as much control and equity as possible, which aligns better with structure #1. A nice capital stack would look like: 70% senior SBA loan, 10% seller note, and 20% equity. Since a seller note helps reduce the equity component a bit, buyers can maintain better personal liquidity, which is often overlooked, but important to lenders.

Symbolically, my bank likes seller financing as it implies the seller has a positive outlook on the company and buyer. The seller has a vested interest post-close and the its take pressure off senior debt service.

At the end of the day, there's many good ways to structure. If you want to discuss specifics, my direct contact info is redacted orredacted.

reply by a searcher 4yrs ago
from University of Massachusetts Amherst in Sydney NSW, Australia

Something else to consider is whether the EBITDA growth rate should be constant across both deals. If you purchase a small company, your scope for bottom line growth may be limited, while with a larger company, you may find more opportunities to optimise cost efficiency, productivity, etc.