Self-Funded Search Economics on Larger Deal

January 10, 2025

by a searcher in USA

Hi all-

I'm in the early stages of thinking through different deal structures. Does anyone have a sense for the economics of a self-funded search on a larger deal ($10m+ EV)? If the searcher is contributing 5-10% of the deal (call it ~25% of the equity investment) and investors contributing the rest of the equity, does the typical 1.5-2x step-up still apply here or is that more for smaller deal sizes?

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Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

1. I agree with ^redacted‌ and ^redacted‌ on larger deals and for deals with no PG.
2. On deals with PG, the step up should be based on, not on total price, but, on the $ amount of PG.
3. Actual Example of an Independant Sponsor deal: P= $15 M., $3 M Equity, $12 M bank + seller, No PG. Main buyer $1 M Equity, Investors (25 total) $2 M Equity. Buyer and all investors got pari passu equity. Lead buyer who also was CEO, got 10% bonus equity on exit. At waterfall: 3 became 85 in 8 yrs.
This was 5x deal. Auto industry. 2 customers.

Reply by an investor
from Northwestern University in Naples, FL, USA

A big reason search entrepreneurs typically retain the vast majority of the equity in self-funded deals is that the deals are financed with SBA debt whereby 70-80% of the enterprise value is debt that is personally guaranteed (PG) by the entrepreneur. The PG means that the entrepreneur carries the highest proportion of the risk associated with the deal and therefore retains the most upside. Deals in the $10-30M range are not funded with SBA debt because the SBA limits the size of the loan. Without SBA debt, most deals require a higher percentage of equity (ex###-###-#### %) and usually don't have a PG requirement, shifting the risk to the investors. When the risk shifts to the investors, the upside also shifts toward them, meaning that the searcher retains a smaller share of the common equity. On the other end of the spectrum, in a PE deal, the entire management team may get 5-15% of the common equity because they have far less risk. If you're doing a bigger deal, I would expect ownership percentages to look more like traditional search or even PE, depending upon the size of the deal. I'd also remind you that, from an absolute dollars perspective, it's often better to own a smaller portion of a bigger company than all of a tiny company.

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