Deal Structures for SDVOSB Acquisitions with Investors?

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May 04, 2024

by a searcher from United States Air Force Academy in Austin, TX, USA

Anybody have an example of a successful deal structure for an SDVOSB with investors? I'm trying to determine how to provide incentives for investors if the veteran owner is required to maintain at least 51% ownership. Thanks.

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Reply by a professional
from University of Virginia in Charlottesville, VA, USA
I've gone down this rabbit hole and one of the biggest challenges, especially for a self-funded searcher, is that the veteran owner has to maintain 51% across all classes of shares. This becomes limiting in a market where investors want preferred shares. There are only a few viable options I've seen to get around this:

1. You raise equity from other veterans with a VA rating. Cleanest way, although greatly limits your investor pool.

2. Find investors who are OK with investing just for common stock. You will likely have to give up a greater percentage of equity, and so are incentivized to go after bigger deals. But If you can convince investors (best if this is from a single source) of the value of set-aside businesses, then they may be OK with just buying in for common equity.

3. Could structure it as a revenue share with investors. Look up Folla Capital Group, ran by a veteran who does crowdsourced rev share raises.

4. Given the new SBA rule where a standby note can count as the equity injection if on standby for 2 years, you could conceivably negate the need to have the equity injection. My argument to any seller to go for this would be "Listen, there are only so many buyers like me that qualify to buy this so we are going to need to be flexible on terms."

5. Last option is DON"T buy an SDVOSB. Buy a generic small biz and convert it to one.
commentor profile
Reply by a searcher
from State University of New York (SUNY) in Buffalo, NY, USA
My brother, who is an SDV, and I chased this for some time. It’s tough to make a deal work with the 51% threshold of ownership and to get minority investors comfortable with some of the language required to show the SDV has absolute control of the entity.

There are some specialized lenders that can get fairly aggressive on these deals as they have mandates to lend to SDVOSBs on behalf of larger institutional clients for marketing and tax incentive purposes.

The biggest challenge we bumped up on were unreasonable valuation expectations by sellers. They want market multiples even though business is dependent on SDVOSB status, which should limit valuation because you can only raise so much debt and equity and still maintain 51% of the entity.
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