Equity contribution in acquiring with a partner

January 08, 2023

by a searcher in Illinois, USA

Hello searcher,

I have been a self funded solo searcher looking for business to acquire. Another solo searcher brought an interesting deal and I like to team up to acquire the business.

Here are the deal structure

1. I will finance the purchase with 85% coming from SBA and providing 81% of down payment
2. Partner-A will provide remaining 19% of down payment
3. Another friend of ours interested in joining and ready to invest . ( he may provide 15% of equity injection so two partner will together 30% equity injection )

Interested in hearing how best to structure the equity ownership so risk and upside is distributed appropriately and fairly.

Partner initially would stay in advisor role but in future they may take some role in the business, when that happens should the partner be awarded additional equity or a compensation and bonus or any other combination ?

What are the pros and cons of having partner taking a role in day to day execution ?

Thank you in advance.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

The SBA does not require someones capital invested to match their equity ownership interest, so you can have a minority partner contribute a majority of the equity into the transaction. However, whomever the majority owner is, they will be required to sign a full personal guarantee, so they will have that risk along with the risk of operating the business.

Keep in mind, that even though the SBA is not required to take a minority owner as a guarantor, if you the primary owner does not show much support for the deal then a lender can always come back and ask for additional support. Sometimes lenders will require things not required by the SBA to strengthen a deal. So whoever the primary owner is needs to qualify on a standalone basis for SBA financing.

If you look to do a change in ownership in the future, this technically would need to be approved by the SBA. The SBA would likely require anyone getting ownership above 20% to sign a personal guarantee.

I am more than happy to jump on a call to discuss in more detail and answer any questions you might have. You can reach me here or directly at redacted Thank you.

Reply by a searcher
from INSEAD in Liège, Belgium

I would adivise to keep things simple. Make sure that everything is clear from the beginning, with signed agreements and easy to understand examples to show the various scenarii.
It can be great to be 2 on the deals, so that you share the ups and downs, you have a sounding board to discuss issues. One can focus on internal stuffs (production, admin, HR), the other on external (Sales, Marketing, networking). Make sure to be complementary if both work daily in the comapny. Discuss a lot before, it is like a marriage, it should last 5 to 7 years minimum so spend time making things clear.

IMHO, it looks like your case in not yet simple, clear, obvious for all scenarii.

+5 more replies.

Join the discussion