A member of the Acquisition Lab called me a few weeks ago who had investors interested in his deal, and he had no idea what to charge them for it.
Good problem to have.
I’ve been on both sides of this conversation, as the operator raising capital and as the guy writing a check into someone else’s deal. If you’re an acquisition entrepreneur, you’ll likely sit in both chairs eventually. Understanding how the investor thinks about pricing now will make you a sharper operator today and a sharper allocator later.
The Two Numbers That Matter
Every acquisition breaks into two numbers. There’s the enterprise value, which is the purchase price plus whatever working capital the deal requires. Then there’s the cash required to close, which is usually a fraction of that number once you layer in debt.
Say you’re buying a ten million dollar business and putting down ten percent. You need a million dollars in cash. Enterprise value is ten million. Cash to close is one million.
That gap between the two numbers is where the pricing conversation gets interesting, and where most operators go wrong before they realize they’ve made a decision at all.
Mistake One: Pricing at Enterprise Value
The first mistake is pricing at enterprise value. You assume the business is worth ten million, so an investor’s dollar buys a proportional slice of that ten million. It sounds fair. It costs you more than you think, for three reasons.
- Your investor is a minority owner with no control over the business, and control is worth something.
- They’re also underwriting your ability to run a company you may never have run before, and that transition carries real execution risk.
- But the part that costs an investor the most, if you flip the lens, is leverage.
Price the deal at enterprise value and you’re diluting your own equity build-up across a full ownership stake you didn’t need to give away. You end up sharing more of the debt paydown than the capital actually required.
Mistake Two: Pricing at Cash Value
The second mistake runs the other direction, and I think it’s worse. Some operators price at cash value instead. The logic sounds generous: if the deal only needs a million dollars to close, an investor who puts in half a million gets half the company.
But that hands your investor full participation in the equity build-up, including all the leverage benefit, without asking them to take on any of the risk that makes your return possible in the first place. They’re not signing the personal guarantee. They’re not the one who has to show up and run the business through a rough quarter. If you price this way, you’re giving away the exact upside you’re personally on the hook for.
What Search Funds Get Right
Search funds have built a structure that gets closer to right, even if it’s designed for a different stage of the process. Investors who fund a search get a step-up in equity value once a deal closes, often around one and a half times their initial capital, plus the option, not the obligation, to invest further in the acquisition at a discount.
That structure recognizes something worth carrying into your own deals. Backing someone early is a distinct kind of risk, and it needs to be priced separately from the risk of owning the business itself. It’s not a perfect template for every acquisition, but the instinct behind it is the right one to borrow.
The Framework I Use: Discounted Enterprise Value
Where I’ve landed, after doing this on both sides, is a discounted enterprise value. It’s not a perfect number and I don’t think one exists. But conceptually it solves all three problems at once.
- It compensates your investor for the control they’re giving up.
- It accounts for the execution risk they’re underwriting.
- It still lets them share in some of the value created by leverage, just not on equal footing with the person who signed for it.
As for how much of a discount, I don’t think there’s a universal answer, and I’d be skeptical of anyone who tells you there is. Every deal has its own risk profile and its own negotiating dynamics. But I can tell you what I use as an anchor. Investors in this space are generally underwriting to a return north of 25%.
Price too close to enterprise value and they’ll never get there. Discount too aggressively and you’re giving away equity value that should belong to you, the one who signed for the guarantee and did the work.
In practice, I’ve found something in the range of 15-20% below enterprise value tends to satisfy both sides.
Why This Matters Beyond Your Current Deal
If you’re structuring your first investor into a deal, this is the number worth working out before you have the conversation, not during it. And if you’re thinking a few years ahead, to a day when you’re the one writing checks into someone else’s acquisition instead of raising for your own, this is the exact math you’ll be running from the other chair.
The operator should get the better deal in this structure. You’re the one whose name is on the guarantee. You’re the one who has to show up every day the business is having a bad month. That has to be reflected in what you pay to bring someone else along for the ride.
Ready to acquire a business in the next 12 months? The Acquisition Lab is your first stop. Reach out today and get on the fast track to becoming an acquisition entrepreneur.
