What are typical terms for an equity investor for a self-directed deal?

professional profile

November 29, 2022

by a professional from University of Virginia-Darden - Darden School of Business in Charlottesville, VA, USA

I am a self-directed searcher looking to acquire a business to hold for the long term. An equity raise would be part of the deal and I'm curious what terms for an investor might look like for a deal like this.

Happy to connect with any potential investors as well.

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commentor profile
Reply by a searcher
from California State Polytechnic University in Pomona, CA, USA
I have found is 70% to 80% is typically held by searcher on self funded. The quick response is the reverse of a traditional search fund models. With a deeper dive, there are many impacting factors which will determine the equity split. Figure in some type of multiple with converting preferred to common which will impact final equity amount.

Seems those who are focused on Self Funded investments are looking for an IRR upwards of 25% with most stating in the 30%+ range. Along with that may be some type of preferred note ranging from 8% to 13% annually, with average being above 10%.

The above would be based on some debt vehicle on the front side.

I have heard whispers of some self funded searches bringing in all their investmentequity from non-traditional search fund investors. People like doctors, dentists, other business owners, and they have been able to work it out at a much lower IRR but with more headaches in setting up the initial structure.
commentor profile
Reply by a searcher
from Princeton University in Annandale, Clinton Township, NJ, USA
Typically in these situations you would be raising capital with preferred and common equity. The preferred return to investors might range from 8-15%, and the common split would be 60-85% to searches, 15-40% to investors. There will be inherent tradeoffs between the two (i.e. if you offer higher preferred return, you can probably push for a higher % of common ownership; the reverse is also true).

The structure can be very flexible to fit the deal, searcher needs, etc. When thinking about preferred rates, probably want to keep in mind interest rate environment--since rates have increased, investors likely expecting higher preferred returns to make things attractive.

Message me if you want to discuss further--I used this structure for my deal.
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