"I have generally seen ~50-60% of equity being allocated as “sweat equity”" Hi do you have anything online to substantiate 50-60%? I did a basic "search fund equity split" google search and don't really see anything greater than 30%. Trying to figure out how to negotiate my split as well (former PE guy as well :))
Thanks John -- feel free to shoot your questions to me at admin(at)guessworkinvesting(dot)com. It's a bit tough to keep up with all inquiries but I do my best!
Economics differ based on the type of searchfund. Traditional search funds cap at 30% of common to the searcher. Allocation is more favorable for self-funded searchers with +50%.
Make sure it's a lawyer who has done small business M&A before. The new, very active group in this space is SMB Law Group, so that is option 1 in my mind.
Great post. When you say hire/fire CEO - were you not stepping in to be CEO yourself? Or you just mean that you couldn't be removed from that role by investors?
Are you seeing any movement towards 10-14% coupon on the prefs/investor loan notes? Working in PE, this is the trend I'm seeing.
Was there any hard negotiation of any vesting provisions on your common stock?
Ha, yes I meant "hire/fire ME as CEO" -- I am running the business day-to-day (though not really a CEO, more of a GM).
Honestly, don't see enough deal flow myself these days to be able to opine on pref coupon. It used to be between 8-12%, so wouldn't be surprised that it pushes up a little. But it's really downside protection for investors, not really the "return" they're going for, so don't think they'd be focused on that.
And no, no hard negotiations -- these deals are 100% around the operator anyway. If you don't have max faith in them to run the business and protect your capital, all the vesting protections in the world aren't really going to help you given it'll be super, super hard to bring in a new CEO anyway at the sub $5M enterprise value deal size.
Great post, thank you! Can you share your thoughts on governance re: profit sharing? Once preferred has been paid off, does searcher typically decide whether to distribute cash available to equity holders, or reinvest it in the business?
Generally the searcher decides the whole way in a self-funded deal. The preferred return is not paid each year/month, it's paid when the searcher thinks it's a better use of funds than reinvesting in the business or paying down debt instead.
"I have generally seen ~50-60% of equity being allocated as “sweat equity”" Hi do you have anything online to substantiate 50-60%? I did a basic "search fund equity split" google search and don't really see anything greater than 30%. Trying to figure out how to negotiate my split as well (former PE guy as well :))
Not really online -- just from being in the market and having seen a few deals now.
Got it thank you. Any chance we can connect offline to get your thoughts on a couple things? Thanks!
Thanks John -- feel free to shoot your questions to me at admin(at)guessworkinvesting(dot)com. It's a bit tough to keep up with all inquiries but I do my best!
Economics differ based on the type of searchfund. Traditional search funds cap at 30% of common to the searcher. Allocation is more favorable for self-funded searchers with +50%.
Any recommendations on contracts and/or lawyers for putting together these equity / shareholder documents?
Make sure it's a lawyer who has done small business M&A before. The new, very active group in this space is SMB Law Group, so that is option 1 in my mind.
Great post. When you say hire/fire CEO - were you not stepping in to be CEO yourself? Or you just mean that you couldn't be removed from that role by investors?
Are you seeing any movement towards 10-14% coupon on the prefs/investor loan notes? Working in PE, this is the trend I'm seeing.
Was there any hard negotiation of any vesting provisions on your common stock?
Ha, yes I meant "hire/fire ME as CEO" -- I am running the business day-to-day (though not really a CEO, more of a GM).
Honestly, don't see enough deal flow myself these days to be able to opine on pref coupon. It used to be between 8-12%, so wouldn't be surprised that it pushes up a little. But it's really downside protection for investors, not really the "return" they're going for, so don't think they'd be focused on that.
And no, no hard negotiations -- these deals are 100% around the operator anyway. If you don't have max faith in them to run the business and protect your capital, all the vesting protections in the world aren't really going to help you given it'll be super, super hard to bring in a new CEO anyway at the sub $5M enterprise value deal size.
Great post, thank you! Can you share your thoughts on governance re: profit sharing? Once preferred has been paid off, does searcher typically decide whether to distribute cash available to equity holders, or reinvest it in the business?
Generally the searcher decides the whole way in a self-funded deal. The preferred return is not paid each year/month, it's paid when the searcher thinks it's a better use of funds than reinvesting in the business or paying down debt instead.
This post couldn't have come at a better time. Thanks for an excellent and informative read!
Thank you Kevin! Appreciate the kind words!