50/50 equity infusion - what should be common equity split?

searcher profile

September 04, 2022

by a searcher in Westwood, NJ 07675, USA

I'm a self-funded searcher looking at a $2M deal that is 90% SBA financeable and I would split the 10% equity infusion with a passive investor, with us each writing $100k checks. She has not funded any of my search costs and would be a completely passive investor in the deal, with me running the company as new CEO. Curious if anyone has been in a similar situation and how you went about dividing up the common equity?

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commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Ben makes a good recommendation. We do have SBA partners that will consider doing the deal with only 5% down so long as the seller will carry back 5% of the transaction on full standby for the life of the SBA loan. However, not all SBA lenders will offer this and typically the deal has to make sense and obviously support the level of debt.

Outside of that, you can structure the equity component however you think is fair. Just be aware that anyone who owns 20% or more of the business under an SBA structure would be required to guarantee the debt. Just because they put up 50% of the equity it does not mean they have to own 50% of the company. You can give them any amount of ownership interest, even down to 5% to 19% if you so choose. You are taking on the largest risk with the personal guarantee and the responsibility of managing the company, and that is deemed too have additional value from an ownership perspective. Lastly, you can set it up where from an ownership perspective they only have say 10%, but they then can get a higher return.

If you have questions and would like to discuss options, I can be reached at redacted Good luck.
commentor profile
Reply by a searcher
from Massachusetts Institute of Technology in Colorado Springs, CO, USA
Overall, model out possible structures and return scenarios, and see what looks fair. Looking at it from the investor side, my concern might be trust in your ability to run the business and lack of control. If your investor seems to have similar concern, you can offer her non-participating preferred shares, but take a bigger share for yourself. This protects her somewhat from the downside and gives you a bigger upside.

If you're sticking to only common stock, think about issues like voting control, compensation in the form of incentive stock options for yourself (see below), etc.

As an aside, does your business case work with 90% debt financing? In the deals I looked at, it was hard to make it work with that much debt. Taking a below market salary might help the situation, and then you might want to ask for option compensation, which plays into the deal structure with your investor.
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