Video: Self-Funded Search Investor Terms

One of the most unique and most commonly misunderstood elements of the self-funded search model is the economics fueling equity investment in a deal. This quick video explains how self-funded equity raises are commonly structured and how you can use this to fund your acquisition.

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Transcript

0:00 So this is kind of the biggest secret in the business buying, entrepreneurship through acquisition world.

0:04 And it's because this is so different than traditional private equity or really M&A in general.

0:08 And it's investor terms and how deals are actually structured on the equity side.

0:14 So for simple math, say your all-in cost for business is $100 and say 90% of that is debt - set that side. It still leaves us with $10 in equity

0:22 we have to bring to the table, except I don't have $10 to bring.

0:25 Instead I reach out to investors and they bring the majority if not all of that equity.

0:30 And here's where it gets interesting.

0:32 Say they bring all of it for simple math, traditional economics say they own 100% of the business because they brought 100% of equity - but not so fast.

0:40 Instead, market terms here say we use the total project cost as a basis and we offer them what's called an equity step up.

0:48 So they brought 10% of the total project cost.

0:51 in return, we're going to offer them a two times or 2x equity step up. Now, they own 20% of the business and we keep 80%.

1:00 But that sounds like an awful investment.

1:01 Why would anybody do that?

1:03 Because before all that even matters, there's another element that we offer them first, we also give them an 8 to 12% preferred return and we have to return 100% of their capital before we go to equity distribution.

1:15 So we have to return all 10 of their dollars first.

1:18 So how does it work each year?

1:19 We have to pay them, say 10% of whatever is left of the money they gave us.

1:23 So if it's still the $10 we have to pay them a dollar.

1:26 If it's $8 we gotta pay them 80 cents.

1:28 Plus we have to work to pay back all of the original $10 on top of that.

1:32 After it's fully paid back, then the preferred return goes away and then we go to the 8020 split.

1:37 It's a pseudo debt instrument called participating Preferred Stock.

1:41 And it's a really good instrument for both sides in getting these small deals done.

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