What are the pros & cons of different deal structures?

November 13, 2025

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

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
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 an admin
from Massachusetts Institute of Technology in Portland, OR, USA

^redacted might be able to help with Deal Structures.

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