Side-By-Side Comparison Of Key Independent Sponsor And Self-Funded Searcher

SIDE-BY-SIDE COMPARISON OF KEY INDEPENDENT SPONSOR AND SELF-FUNDED SEARCHER

MVA Corporate Members John Gilson, Colby Jenkins, and Mike Miller outline a side-by-side comparison of key independent sponsor and self-funded searcher terms document.
There is often a blurring of the lines between independent sponsors and self-funded searchers as participants in lower-middle market mergers and acquisitions transactions. The table John, Colby and Mike have created presents a side-by-side comparison of the key economic and governance terms in arms-length lower-middle market M&A transactions. It should be noted here, however, that self-funded searchers will often take a hybrid approach by borrowing what would otherwise be an independent sponsor term, and vice versa. Independent sponsors and self-funded searchers should consult with experienced legal counsel before finalizing the terms they have outlined in this document with their investors.
To view the side-by-side comparison document, please visit: https://lnkd.in/dze_XGn

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searcher Georgia Institute of Technology University of Missouri - Columbia University of Michigan - Ann Arbor - 04/09/2021

Thank you for putting this together. We started more like self-funded searchers and are now a full-fledged independent sponsor. If anyone would like to talk about our "evolution," I would be happy to. I have very strong opinions about search-fund vs. independent sponsor model just FYI.

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searcher Harvard University - Harvard Business School Stanford University - 04/09/2021

Funded searcher here, but was curious about the management fee component of the independent model. How much time do you expect to work in an acquired business -- could an independent sponsor essentially build an annuity stream from these management fees? seems almost too good to be true.

investor University of Nebraska - Lincoln - 04/12/2021

Timi - Buddy of mine just closed an independent sponsor deal with $5M of EBITDA. He expects to spend 2 days a week of his time on the portfolio company (acquisitions, board obligations, strategy) in the first year, with it declining to 1 day a week the following year. He gets an ongoing management fee of greater of 5% of EBITDA or $250K unrelated to his time spent on the business.

investor University of Nebraska - Lincoln - 04/09/2021

Hey John - I feel like the article would be improved if you were to explicitly define what you view as an independent sponsor and self-funded searcher as I am left a little confused after reading. The language around the different structures available in ETA are still evolving and many times murky. An example...I think the way in which you use the term 'self-funded searcher' is very different from what I understand it to be. What you describe sounds like you are taking parts of the 'traditional funded search' fund and parts of the 'self-funded search' and putting them into one. I see materially different economics and vesting mechanics in self-funded deals than what you've outlined. Maybe this was done for simplicity but I'm guessing you'll have a few comments about that from this group...

You reference that "Self-Funded Searcher groups typically earn 30 percent of the common equity while solo Self-Funded Searchers typically earn 20 to 25 percent." This is true in funded searches, but I would expect a much higher ownership % in a self-funded searcher model. The vesting mechanism seems way off and is terrible for the entrepreneur...

Would love to hear your thoughts if you think I'm way off base here.

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searcher Stanford University California State University, Fullerton - 04/12/2021

Great piece, John. I appreciate the effort here to bring more clarity and structure around the search fund space and independent sponsor model, the latter which I was not even aware of when starting my ETA journey. I've noticed that the self-funded search space can feel quite nebulous at times, with some critical information being mostly tribal knowledge at this point.

However, I'd like to echo Ben's point above about self-funded searchers expecting a larger ownership percentage (I'd surmise >50% in most cases). Primary deterministic variables that I can think of include presence/absence of a personal guarantee on financing, deal economics (entry multiple, amount of seller financing, etc.), searcher experience and background, searcher-deal fit, market size and growth expectations, and company characteristics (processes already in place or need to be put in place, key team members already in place or need to be hired, revenue and margin size, and low-hanging fruit that can be quickly realized in order to de-risk early, etc.).

investor University of Western Australia - 04/12/2021

Interesting thanks

investor Harvard University - Harvard Business School Harvard University - 04/12/2021

Very well done. Just one suggestion: I would probably replace "self-funded searcher" with "traditional searcher"...the economics you described are for traditional searchers, and while self-funded searchers sometimes end up with the same economics as traditional searchers (most commonly when it's a large deal), self-funded searchers often have very different terms

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lender - 04/12/2021

It would be great to have all 3 in a side by side comparison. Many searchers have questions about what to expect from the equity and governance side of the deal.

searcher - 04/12/2021

Thanks for sharing

SIDE-BY-SIDE COMPARISON OF KEY INDEPENDENT SPONSOR AND SELF-FUNDED SEARCHER

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