What are the pros & cons of different deal structures? - Searchfunder

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by a searcher from New York University
in Kansas City, MO, USA

7mos ago

What are the pros & cons of different deal structures?

I’ve recently had a few friends early in their search ask about the different deal structures people use with capital partners - what they are, the pros/cons, and when each one actually makes sense. I’m familiar with a handful, but there are always variations I haven’t seen executed in the wild. So I went down the rabbit hole: searched Searchfunder, pulled every thread I could find, and had ChatGPT synthesize them. Some structures I know well; others were new to me. I dropped the output in the first comment. It’s not MECE, but it’s a start. Are there any structures you’d add? Anything in the list that should be refined or corrected?

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reply by a searcher 7mos ago
from New York University in Kansas City, MO, USA

1. General Goals - Investor goals: De-risk quickly, return principal early, and hit target return thresholds (often ~40% IRR over 5–7 years). - Searcher goals: Avoid a PG when possible, eliminate debt quickly, earn a living wage, and participate meaningfully in upside — whether long-term hold or a 5–7 year timeline. 2. Bread-and-Butter Structures - Self-Funded Search: Investors receive a step-up + preferred return, often with quarterly dividends. Searcher typically uses SBA, holds a PG, and raises a preferred equity slug. Searcher’s equity grows as debt amortizes after investor return thresholds are met. Searcher likely maintains control; personally owns the downside. - Sponsored Search: Investors receive step-up + preferred return + pro rata participation rights; searcher earns equity based on growth or return thresholds. Capital partners maintain control; downside is shared. Often minimal or no senior debt. Equity vesting can be tied to specific KPIs (growth, EBITDA, ROIC targets, etc.). 3. Creative / Alternative Structures - Earn-In to Full Ownership: Searcher’s equity vests over time or performance to the point they can fully own the business. - Equity Injection Gap Coverage (“Zero Cash In”): Investor funds the $200k–$600k senior lenders require. Searcher contributes PG + sweat equity, with equity vesting schedules or distribution-based earn-ins. - Short-Term High-Yield Preferred: 10–12% preferred yield; 20–30% conversion to common; 1.5x–2x buyback option over 2–5 years. Useful for small acquisitions where searcher wants long-term control and investors want structured near-term liquidity. - Priority Debt-Paydown: 100% dividend sweep to accelerate debt paydown until a debt threshold is hit → then preferred catch-up → then standard waterfall. 4. Investor Liquidity Structures (excl a typical sale) - Optional Buy-Out Mechanics: Pre-negotiated buy-out multiples, triggered after certain milestones (e.g., 3 years of dividends, pref accrual thresholds). Key questions for investors: a) Will there be demand for the shares? b) Will the business be able to self-fund repurchase? c) Will the searcher be able to buy them personally? - Synthetic Exit via Recap: Investor liquidity provided through recapitalization. Key consideration for investors: What must the business look like to be recapitalized (size, margins, lender appetite, etc.)?

reply by a searcher 5mos ago
from University of North Texas in Austin, TX, USA

One note on self funded and zero cash in - the searcher usually needs at least 5% of the deal in liquid capital. I've not seen any banks lately go for a "zero cash in" deal. They want 3% skin in the down payment and 3-6 months of debt payments of personal liquidity as well. Lenders are tightening standards and this is one area I'm not seeing people talk about and then get into a deal only to find the banks aren't willing to finance. So talk to banks, etc before you put any offers in to know who will help find whatever route you want to go.

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