| Traditional Model Generally pursued by recent MBA graduates, but open to anyone. Searchers raise a pool of capital ($400-$600k) to fund a ~2 year search and then investors have a ROFR on the acquisition found by the searcher. |
Self Funded: The “self-funded” part of self-funded search refers to funding the costs of finding and closing a deal. It does not mean you have to self-fund all the capital required to actually purchase the company. |
| Cons |
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| 1.Underwriting hurdle very high |
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| 2.No hard commitment |
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| 3.No broad control |
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| 4.Search capital too expensive. |
Cons |
| 1.Typically must acquire a small business |
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| 2.Lack of credibility with sellers |
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| 3.Needs large amounts of savings or to stay in job at the same time |
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| 4.Need to PG debt |
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| Pros |
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| 1.Investor network and support |
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| 2.Ability to acquire larger targets |
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| 3.Credibility with sellers/ certainty of funds |
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| 4.Financial security during search |
Pros |
- Better overall searcher economics
2.Majority ownership and control from closing
3.Flexibility on deal type
4.Ability to search part time Control of your destiny. Having the option to own your business forever. Raise money from individual investors (as opposed to funds that need to return capital) who are aligned with a 20+ year vision. A self-funded search generally results in higher total equity ownership and governance control of the company for the searcher. |
| Investor base
-Institutional, typically underwriting at 35% IRR base cases | Investor base
-Individual, typically underwriting risks on a case by case basis but often at -30% IRR |
| Searcher Economics
-25% common equity vested 1/3 at acquisition, 1/3 over 4 years, 1/3 at exit linearly from 25-35% IRR | Searcher Economics
-% of common equity dictated by deal economics and state of market but typically ranging between 60-80% |
| Acquisition
-Search rounder investors get ROFR
-Search round rolled into acquisition equity at 50% markup | Acquisition
-Must raise all equity capital upon acquisition |
| Search round
-$300k for 2 years’ salary and $200k for search expenses ($500k total) | No Search round
-Entrepreneur funds all living expenses and some search expenses |
"Alternative" ETA models has become a popular topic at business schools around the country. 1.
Self funded 3. solo sponsored 4. geographic based 5. greenfield 6. roll up 7. apprenticeship 8. holding co. What am I missing?
- Traditional funded: Generally pursued by recent MBA graduates, but open to anyone. Searchers raise a pool of capital ($400-$600k) to fund a ~2 year search and then investors have a ROFR on the acquisition found by the searcher.
- Self funded: (a): Searcher uses their personal capital to both find and acquire a business. Generally these searchers pursue smaller acquisitions ($500k - $1M of EBITDA) and use an SBA loan to help finance the acquisition
(b): Searcher uses personal $ to find a business to acquire, but then raises outside $ (potentially from traditional search investors) to finance the acquisition. This allows more freedom when selecting investors/terms at the time of the acquisition.
- Solo sponsored: Accelerator: Searchers work with one firm that has expertise in searching for, acquiring and operating small businesses. The “accelerator” provides 100% of the capital for both the search and the acquisition and will take a board seat at the acquired business.
- Solo sponsored: Single Investor: Generally similar to the traditional search model, but with only one investor (traditional search generally has 10+). Best for searchers with great alignment with one investor they know well. Link:
- Geographic based: A sub-set of all the above, but with a focus on a particular geography. Best for searchers with geographic constraints. Increasingly popular, but still not preferred among some investors as it can be viewed as constraining the number of acquisition opportunities
- Greenfield: Raising search capital similar to a traditional model and then starting a business. Most greenfield approaches I have seen started as a traditional search and then morphed into starting a business when the searcher had a strong industry thesis, but no acquisition.
- Roll up
- Apprenticeship: Working with a business owner to learn the business and eventually work your way into ownership. See thread by @joelrandyblake
- Holding co.: Highly flexible structure that allows for multiple acquisitions, an indefinite time horizon and varying amounts of operational involvement. Capital can be raised deal by deal or up front. (full disclosure, we approached EtA using a holding company)