Combination SBA/Investor funded acquisition?

August 18, 2020

by a searcher from Pepperdine University - Graziadio School of Business and Management in Boise, ID, USA

My partner and I are looking to use a combination of investor funds and SBA to acquire a business in the $1-2 million EBITDA range. We have a proven track record with other businesses acquired/scaled and now have interest from investors who want us to acquire a business using SBA funds, with the investors making up a large portion of the down payment (approx 10-20%).

Are there any hurdles with regards to SBA? Any hurdles for returning capital to investors?
What is a good ownership % for this type of deal, considering the principals will be on the hook for the SBA (80% of purchase price) with the investors contributing the balance (approx 20%)?

Any other feedback or insight is appreciated! Thanks!

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Reply by an intermediary
from Boise State University in 800 W Main St, Boise, ID 83702, USA

Any owner of at least 20% or more will have to personally guarantee the SBA loan. Also, if an owner with less than 20% ownership is considered a key employee or manager, a personal guarantee will likely be required. If the investors own other business interests, those businesses must be disclosed in order to determine if there are any "size" issues. For example, if the investor has a large net worth or owns larger businesses, then they may be "ineligible" to get an SBA guarantee.

When purchasing a business, new owners must purchase 100% of the acquired company.. And as stated by Tony in message above, each lender will apply their own underwriting standards on top of the SBA rules. You should expect that the bank will not allow investors to get repaid before the bank does. At the very least, the bank will require that debt service coverage and perhaps leverage ratios be maintained at the bank's prescribed level for a period of time before investors (or you) are allowed to distribute earnings. for the purpose of repaying investors.

Reply by a lender
from California State University, Sacramento in Seattle, WA, USA

I"m happy to talk about the nuances of SBA loans and the equity portion as to SBA requirements. DM me at redacted There are some industry standards about limits on returning capital to the minority owner investors and limits on potential ownership exceeding 20% upon exit. I can walk you through some sample spreadsheets for equity planning purposes. Generally, using investor equity should be ok for SBA and in my opinion strengthens the deal profile.

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