In December 2024, we hosted a webinar in conjunction with Acquiring Minds. We gave a presentation on simplified waterfalls and then answered questions from the audience.
Question Timestamps
- 0:30:00: Upon exit, who ensures that this process is executed properly? Is it a specific entity or a service provider? Given how delicate this process is and how much room for error exists, what do the mechanics of that look like?
- 0:31:43: I’m seeing “PIK” mentioned a lot in the questions. What does that term mean?
- 0:33:39: One simplification you made here—though perhaps not a minor one—is that all the debt had been paid off in both cases. In reality, that’s often not the case. Where does the remaining debt fall? What “bucket” would that land in?
- 0:36:15: Can you zoom in on the step-up math for a self-funded deal? You also mentioned that this term comes from another context. What’s the history behind it?
- 0:39:42: This essentially feels like a private equity deal, but is carry technically considered equity? We often talk about percentage proceeds, but does carry function as equity? Or does it not matter because the governance is defined in the documents? In an independent sponsor context, where carry doesn’t correlate to equity, how does that work in practice?
- 0:43:42: We’ve received a couple of questions about tax distributions and how those are treated—or not treated. Could you expand on this debate?
- 0:48:05: Are there any rules of thumb or general guidelines about when a searcher’s cash injection receives preferred returns? Is this a standard practice, or is it purely negotiated? How does it fit into the broader set of levers to negotiate?
- 0:50:22: Regarding searcher compensation pre-exit, Bill mentioned earlier that investors typically won’t allow a searcher to pay themselves an outsized salary, like half a million dollars. Can you expand on this?
- How common is it for a searcher running a self-funded search to negotiate salary?
- How do annual bonuses fit into compensation?
- What is market standard, and what do investors and lenders generally find acceptable?
- 0:54:26: For the independent sponsor waterfall, if there’s seller equity—like rolled equity—or management equity, where does that fit in the waterfall? Could you touch on this again?
- 0:57:54: Have we discussed MOIC and IRR hurdles in the independent sponsor space? This seems more common there than in search fund structures. Could you explain how returns at exit (and carry) are tied to these metrics?
- 1:00:23: For context, MOIC—Multiple on Invested Capital—reflects how much you’ve multiplied your money: 2x, 3x, or 4x, for example. Some questions came in about the step-up structure. Is “step down” actually a more accurate term? Nicholas James often refers to it this way, as you might put in 90% of the equity but end up with a smaller percentage of the overall proceeds. Does that framing resonate?
- 1:02:25: To clarify: If I’m a prospective investor considering the final equity position in this deal, how much of the business am I effectively getting?
- 1:05:31: On the topic of step-ups: We’ve been critical of the term, but it’s not that the structure itself doesn’t make sense. It’s more that the term feels misapplied in self-funded contexts. Is that a fair take?
- 1:06:24: For a self-funded searcher: If they put in their own equity (say $100,000), do they also get a step-up on their own money? And does that include preferred returns?
- 1:08:56: In this space, investors aren’t going to get out of bed for returns below the 30% range—maybe the high 20s for particularly safe, low-risk deals. Since this is considered a risky, alternative investment compared to public markets or treasuries, how do you balance the need for higher returns with attracting capital?
- 1:12:12: For a self-funded searcher who takes on investors—including preferred equity—what happens if they decide to hold and run the business indefinitely, with no planned exit? Investors will want their capital back eventually, so how would a searcher unwind that relationship?
- 1:16:07: To trigger a put option, the business usually needs to meet certain performance metrics agreed upon in advance, correct? And often, those options aren’t exercisable until five to seven years in, right?
- 1:18:35: Tell us about the firm. Tell us about how you work. Tell us what searchers and sponsors need to know about working with you.
Workshop Handout
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