Every couple of weeks or so, at Main Street Capital Network (you can learn more about us in this Searchfunder post), we send out a newsletter to searchers we've connected with. This past week's article far and away got the most positive feedback, so I thought I'd share it with the Searchfunder community in case others find it useful.


By the way, we like to meet acquisition entrepreneurs (searchers and independent sponsors) at all stages of the search/deal process. Please learn how to reach out to us here, whether you are:

1. Still searching
2. Preparing / negotiating an LOI

3. Under LOI


If you're an accredited investor interested in investing with us in search deals, please fill out this investor form.

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Standard Investor Terms


While traditional search fund gap equity terms are driven by the largest institutional search fund investors, and independent sponsor economics generally follow the McGuireWoods Independent Sponsor Deal Survey, up-to-date details around the relatively new self-funded search model are not as widely available.


That being said, we are constantly reviewing deals and it is clear that a set of standards is starting to be accepted and expected by investors.

Self-Funded Acquisition Investor Terms


Typical investor terms for self-funded search deals are laid out below.

While there may be exceptions to these, it's important to remember that if you market your transaction to investors that constantly review self-funded deals, such as those that are part of Main Street Capital Network, they are used to seeing something very similar to the below.

When you deviate significantly from these terms, it can appear as if you haven't done the work to understand what investors expect, or it can make your deal less competitive as compared with other investment opportunities that follow these guidelines.

IRR: 30-40%

Given the risks inherent to an SMB acquisition, investors expect an annualized return of at least 30%.

Liquidation Preference: 1.0x

This ensures that investors receive their initial investment back before the searcher receives any distributions.

Preferred Return: 10-12%

This is the rate of return that investors receive before any distributions can be made to the searcher. While we sometimes see high single-digit preferred returns, this is becoming increasingly rare as interest rates remain elevated.

Step-Up: ###-###-#### 25x (for SBA deals)

The step-up determines what share of the company investors own. If the step-up is 2.0x and investors contribute 15% of the transaction's enterprise value (purchase price, working capital, deal expenses and any other capital needs), investors will own 30% of the business (2.0x * 15%). Conversely, as a searcher, you would receive the remaining 70% of the business as your incentive/carry.

This number can very quite a bit though, especially for non-SBA deals where debt is often less than 60% of the capital structure (in which case, the step-up will be lower since the equity investment is such a large percentage of the capital structure).

Annual Salary: $100,000-$150,000

This one is pretty simple. Investors don't want you to be so stressed out about money that you can't focus on the business, but they also want to make sure you're incentivized to increase the value of their investment. There may be exceptions to this, but be aware that investors will be very focused on a number that falls outside this range.

Searcher Investment

Any capital you invest into the transaction should also be into the same security that investors are receiving. Consequently, the vast majority of searchers that raise capital will be invested in both classes of the company's equity.
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