How to Present Your Deal to Investors (And Get 4x Oversubscribed)
This is the key content of a great Investor Presentation
Over the past two years, I’ve looked at over 100 self-funded search deals and invested in 7 of them. The vast majority of deals don’t get even get to a call because they are either missing key information or the thesis is not convincing. While I inevitably must have missed a good deal or two, I can’t spend several hours on each deal finding the relevant information on 100 deals to find a few more good deals. Most self-funded search investors are running their own companies or careers, so in order to get the best investors and make sure you successfully raise the equity for your deal, you have to make it easy for potential investors to assess your deal fully and quickly. Here’s the structure we used that helped us get commitments for 4x the capital we raised along with the answers / examples for our deal (artificial turf installation company).
A great investor presentation needs to answer two key questions:
What am I getting as an investor? (Investor Terms)
How are you going to create value? (Investment Thesis)
Key Components of Attractive Investor Terms
When I look at deals, I start with the the purchase multiple and the step-up. If they are not in range (multiple too high, step up too low), it means I won’t make reasonable return as an investor, even if the searcher executes perfectly. In that case, I can save myself the work of understanding the business, the industry, the searcher and the thesis since.
The key components to properly lay out investor terms are:
Buyer Adj. EBITDA: This is the EBITDA you would expect as the buyer the first 12 months of you operation if the business did not grow or shrink. It needs to reflect your go forward salary
Purchase Price / Multiple (4.0x)
Sources and Uses: Show especially the investor equity raised as a % of total sources (10% in our deal)
Investor Terms:
Common equity percentage offer to outside investors (20% in our deal - 2.0x step-up)
Preferred rate
Liquidation preference
Your salary
Attractive investor terms for self-funded search deals are 3.5x - 4.5x EBITDA multiple, 1.75x - 2.25x step-up (lower multiple, lower step up and vice versa), 10-13% preferred rate, 1.0x liquidation preference.
Key Components of a Good Investment Thesis
The goal in every private equity deal is to increase the equity value of the business over the hold period. Equity value is generated by the cash flow during the hold period, growing profits (EBITDA), and growing the valuation (EBITDA multiple). Your Investment Thesis has to explain why the business will maintain / grow profitability and / or why the valuation multiple will increase.
This section of the presentation should include the company overview, industry overview, product / services overview, etc. and answer the following key questions:
What does the company do? (Artificial landscape turf, pet turf and putting green installation)
Why does the company have a reason to exist? (Weather makes it difficult to keep grass alive in Texas. Customers want to a functional, convenient alternative. The install process is labor intensive, requires multiple people and experience to get a perfect outcome creating demand for specialized installers)
What is our right to win? (Strong reputation and online presence, strong team that is staying on, long term installer and supplier relationships)
How do we create equity value? (Demand growth driven by growing adoption of the product, increasing population of the Texas, convenience-focused millennials becoming a larger share of home owners. Sustainable margins and cash flow generation due to sustainable, competitive cost structure and pricing)
What do I have to believe to invest in this deal? (Texas population will continue to grow, homeowners will continue to embrace the product and spend on home improvement, supply chains and installation labor cost are sustainable / increases can be passed on to customers)
Your Investment Thesis needs to lay out a clear path on why and how we are going to win (increased equity value) and what needs to happen in order to get there. A few common gaps / issues I see that makes me pass on a deal are:
I can’t figure out what the company actually does
There is no thesis / no actions on how we are going to increase value, just a description of the business
You can’t tell me what I need to believe / what I am betting on. Don’t give me an Ibis industry report. Tell me why your business, in your market under your leadership will grow
Your value creation plan is not focused on tangibles, but personal preference (I.e. it doesn’t matter if the website is old and you don’t like the design. If you are ranking and converting well, your website overhaul is a personal project and not one that is creating value)
Conclusion
When you get ready to reach out to investors for your deal, make sure you have the key components ready and you will have no issue raising the equity if you offer fair terms.
When we reached out to investors, we were able to tell a simple and appealing story. We’re buying an artificial turf installation business for 4.0x EBITDA. We will create value by capturing the whether and population growth driven growing demand for artificial turf installation due to our reputation and installation capabilities and we are offering a 2.0x step up.
Raising capital is not about convincing people of your view of the world. It’s about clearly laying out your view of the world so the people that agree with can invest with you and get a piece of the upside if both of you are right.