Compensating Investors in Self-Funded Deals (e.g. <20%w/SBA Loan)

searcher profile

May 26, 2023

by a searcher from University of Maryland at College Park in New York, NY, USA

Hi all,

Hoping to get some help thinking through options for compensating a minority investor(s).

Considerations include:

1. Use of investor funds (e.g. cash to buyout existing owner vs. funding operations/growth)
2. Cash distributions -- at what point does an investor expect distributions or dividend
3. How is my debt (SBA) service considered when calculating EBITDA and reinvestment into the business

And, what else should I be considering when bringing on minority (<20%) investors to fund the acquisition?

Feel free to comment, DM, or email redacted

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commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Great questions. I have a few comments from a lending perspective. If you are using SBA financing, the amount of equity an investor brings to the table does not need to match their ownership interest in the new entity. So you can have a minority investor bring in 50% of the required equity but own less than 20% of the entity and they would not need to guarantee the loan.

The SBA will not allow any guaranteed distributions or guaranteed payments to equity investors as part of the operating agreement. You can set it up where certain investors get preferred returns, but none of it can be guaranteed. So in essence you cannot make those payments ahead of making your debt service payments. Because no payments will be required to be made, the SBA and lenders will not count any preferred returns in calculating debt service. As those are deemed to be discretionary payments they will not get factored into the Bank cash flow. I am not sure that is the question you were looking for an answer on, but just in case.

If you have any other questions from a financing perspective, I am more than happy to help out. You can reach me here or directly at redacted Good luck with your search.
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Reply by a searcher
from California State Polytechnic University in Columbus, OH, USA
Hey again ^redacted‌! I am still working on your email - but curious regarding what you said here - do you see a lot of investors being okay with this? fairly typical?
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