Self-funded search deal: acquisition fee standard?

November 15, 2022

by a searcher from Harvard University in Boulder, CO, USA

I've invested in a number of self-funded search deals and am looking at one currently with a 125K acquisition fee (approx 2.5% of EV) that would go to the 2 searchers. They plan to roll a portion of it into the deal as equity and keep the rest as cash.

I am curious if other investors think that is standard? Is it something you'd be comfortable with or no?

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Reply by a searcher
from INSEAD in Toronto, ON, Canada

The answer depends. To me, the key is equity alignment. Do they have enough skin in the game to ensure that their goals are aligned with the investors. As someone else said you need to consider the full set of deal economics. That said, If the searchers spent cash out of pocket during the search, this is somewhat reasonable. Depending upon the level of cash out of pocket spent, I would negotiate that above that cash reimbursement, the remainder of fee however be rolled into equity

Reply by a searcher
in Toa Baja, 00949, Puerto Rico

I think it is reasonable to reimburse search costs including legal fees, valuations, and other consulting. Also, I assume that the searchers are getting an equity stake that is disproportionately higher than their cash contribution as compensation for their time and effort finding and structuring the deal; if that is the case, the fee could be considered unjustified double dipping by an equity investor.

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