Just met a first-time searcher with a $2.5m deal under LOI at below 4x.
Option A: The Standard LMM LBO
The standard path here is to LBO it: raise $5m of debt, the rest is seller note, rollover equity, and new equity (~$3m). Low valuation sets the stage for strong returns. He can get in the game and build a track record. This is the clean and easy path, it’s proven and trailblazing not needed. He can do follow-on round if he wants to further develop this platform, or do new platforms. If EV doubles, cash in 4x MOIC = big personal windfall.
Option B: The Buy & Build Roll-Up
Instead, he is raising $50m, all equity, to do a roll-up in this industry, to own the space, where this LOI will be the initial platform/launchpad. He’s partnering with 1-2 PE groups, who are bringing 80% of the capital, and thus onboarding strong and well-capitalized partners, but also relinquishing control. The searcher’s carry is a fraction, actually comparable to the go-alone route. Strategy is heavily M&A-dependent, including the associated integration playbook. If they quadruple EV to $200m, then 4x MOIC.
I prefer Option A both as an independent sponsor and investor.
But I like, respect, and admire when people swing for home runs. Godspeed! And he’ll amass experiences and work relationships that may be invaluable down the road.
