Deal Structure: $1-5mm / Equity Breakdown
March 28, 2024
by a searcher from Samford University - Brock School of Business in Birmingham, AL, USA
I have some “under the hood” questions about ownership and equity breakdowns. All thoughts and feedback are welcome!
As we know, if you get an SBA loan to acquire a business, anyone with more than 20% ownership must sign a personal guarantee.
My question is how are folks structuring deals with their equity investors?
For example, if you had a $5mm business doing $1mm in EBITDA.
You raise $1mm in equity and $4mm in an SBA loan.
My brain traditional goes to a 70/30 split where the investors own 70% and the searcher gets 30%. This would leave 70% to divide amongst possibly 10 investors ($100k each).
However, that would not get the deal done to satisfy the bank. So you need someone with a big enough net worth and 20%+ ownership in the deal.
As you raise your search fund, are you finding someone up front to agree to a large capital investment AND for them to sign on the debt?
For context, I would like to structure a deal with an investor where they 3x their capital and retain ~1/3 ownership in the deal.
any advice or thoughts?
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
If there is no owner who has a 20% or greater ownership interest, whomever is the primary owner or Manager is then required the guarantee the loan under the SBA rules. So you cannot get away with having everyone below 20% and no guarantee.
As for how the structure it with investors we usually see varying structures all about what you can negotiate with your investors. We have seen situations where there is a preferred return for the investors so they are willing to make the investment. So long as there is no mandatory payout for a preferred return, then the SBA will allow this. We have also seen situations where there is language where ownership can convert to a higher percentage once the loan is repaid, and we have seen this work as well. As we do not get involved in negotiating the equity side I cannot say for sure, but those are just a few examples.
If I can help with anything else you can reach me here or directly at redacted Good luck.
from California State Polytechnic University in Pomona, CA, USA
Second, being on the hook for the SBA loan and an 80%+ owner is the reason that the Searcher has the ability to negotiate for most of the equity in the business. That is why a Self-Funded Searcher can flip the equity distribution versus a traditional searchfund.
Third, you can now utilize a seller note to cover the equity part of the deal if you find the right bank.
Be generous with investors, as they are your partners, but don't give away the farm.