Self-Funded Search Model & Exit Multiple

searcher profile

July 04, 2021

by a searcher from Northwestern University - Kellogg School of Management in Bangkok, Thailand

Question 1. Are there any standard terms for a self funded search? e.g. how much equity would the manager get (vs. the standard 25% in a funded search)? How do traditional search fund investors react to a "soft agreement" with a self-funded searcher? Theoretically, investors' risks are way lower due to a) no funding for the search period, which is the biggest risk, and b) longer management experience of a proven manager. This leads me to believe that the terms for the manager should be much better than 25%. Any thoughts?

Question 2. A typical acquisition multiple is 4-5x. In my target geography & industry PE acquisition multiples are 10X on average. Is it wrong to assume that one can acquire at 5X a company below the PE radar (say $1.5m EBITDA) then grow it overtime to a larger company that would become interesting for Private Equity (say $3-5m EBITDA) and, therefore, apply an average 10x exit multiple as per industry & geography standards?

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commentor profile
Reply by a searcher
in Pickering, ON, Canada
Can a self-funded searcher get more than 25% carry? Yes, if the equity raise is low. If you can get 100-200K equity cheques from multiple individual investors - you can influence terms. However, if the equity raise is large ($1M or more) and there are institutional investors in the cap table, it will be difficult to get more than 25% (30% in case of partnered search). Refer: https://www.searchfunder.com/event/view/280

Can you have an exit at larger multiples to PE? Yes, absolutely. A lot of search fund companies are grown & then sold to PE at higher multiples!
commentor profile
Reply by a searcher
in New York, NY, USA
Its the question that keeps all of up at night as business owners/acquisition entrepreneurs. The short winded answer is that lower middle market is really opaque, anything can happen. Keep in mind a business that transacts for 1.5 million doesn't really have the management team or systems in place to attract a private equity buyer. So even if you "grow" your business to 3 million in ebitda, a sophisticated buyer is going to expect a certain management team/structure in place which could knock out another 500k in ebitda. Lot of these higher multiples offers aren't cash deals either as it usually the case in the SBA world. Earn outs, sellers contingencies, escrows etc... you may even end up walking away with the same cash at close multiple. Even worse, private equity/large buyers with that type of money are notorious for suing. if you're serious about getting into the space, find a business you would be passionate about and focus on growing it. Can't bank on multiple expansion, but if it happens great. Don't count eggs before they hatch.
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