CHAPTER 19 Raising Acquisition Equity Flashcards
(21 cards)
Why is it often easier than expected to raise equity for a good acquisition opportunity?
There are more investors looking for strong opportunities than there are good investments, especially in private equity.
What kind of investors are often interested in funding private acquisitions?
High-net-worth individuals, such as business owners or partners in law firms, who struggle to access private equity deals.
What portion of a purchase price do equity investors typically fund?
About one-third of the total purchase price.
What annual rate of return do equity investors typically expect?
At least 25% to compensate for risk and illiquidity.
Who are typical sources of equity if you had a funded search?
The same investors who funded your search, plus others you’ve built relationships with during the search.
What must self-funded searchers do differently in equity raising?
Raise all equity themselves from investors they’ve kept informed during the search.
When should you start assembling the investment memorandum?
After you have a signed LOI (Letter of Intent).
What should the investment memo include?
Business overview, due diligence findings, financial projections, deal terms, governance, and your retained equity.
What security do investors typically receive in smaller private deals?
Preferred stock with return of capital, preferred return, and residual equity.
How is the preferred return typically structured?
Capital is repaid, followed by an 8% return (example), then remaining profits are split between the entrepreneur and investors.
What is a “catch-up” in equity structuring?
A mechanism where the entrepreneur receives their share of the preferred return before profits are split.
Give an example of trade-offs in deal structuring.
Ari Medoff accepted no catch-up for a higher residual profit share; Jude Tuma accepted a standard share and got a lower preferred return rate.
What happens if due diligence reveals lower EBITDA than expected?
You negotiate a lower purchase price, which affects the financial model and investor returns.
What IRR did Zeswitz’s deal yield after adjusting for lower EBITDA?
20%, which is below the investor target of 25%, making funding more difficult.
How does self-funding affect deal structuring flexibility?
You can adjust ownership terms to optimize your share while still delivering attractive returns to investors.
What approach should be used when creating a financial model for investors?
Use a conservative model that supports investor returns and explain upside possibilities separately.
What’s the danger of overly optimistic financial projections?
Investors may view them as unrealistic and decline to invest.
What should be your process when reaching out to investors?
Email a short description, schedule a call, follow up with the full memo, and answer questions.
What is the purpose of initial investor calls?
These are sales pitches, not informal chats, and should be taken seriously.
Why should you seek more equity commitments than needed?
To account for possible dropouts and avoid last-minute funding gaps.
What formal step follows securing verbal investor commitments?
Your lawyer prepares and circulates the shareholder agreement.
