Search Fund and Independent Sponsor Acquisitions

Most deals use a new holding company that raises the equity and borrows the money, often with a subsidiary that buys the business. Its company agreement sets the investor terms: classes of units, any preferred return, distributions, board seats, approval rights and what happens if the searcher or sponsor leaves.

The capital stack usually combines senior debt from a bank or SBA lender, a seller note and investor equity, sometimes with the seller rolling part of the price into the buyer. Each piece limits the others. Lenders commonly restrict seller note payments and sponsor fees, and investor terms such as preferred returns or redemption rights have to fit the lender's requirements.

In a traditional search fund, the investors' search capital usually converts into equity at a stepped-up value, and the searcher earns a share of the equity against performance targets agreed in advance.

Independent sponsors are usually paid three ways: a closing fee, often a percentage of the deal value and sometimes rolled into equity; a management fee the company pays for the sponsor's work after closing; and a promote, or carried interest, a share of profits that often rises as investors' returns pass agreed hurdles. We write these terms into the company agreement and fee agreements and check them against the loan documents. Their tax treatment depends on the structure, so we work with the client's CPA or tax adviser.

Selling units to investors who won't help run the business is often a securities offering, even when the investors are friends or former colleagues. The raise needs an exemption and the right filings, and a public website or broad message about it can count as general solicitation, which some exemptions don't allow. Our private offerings page covers the options.