Fundraising options for businesses with diversity affiliation

February 22, 2023

by a professional from University of Virginia-Darden - Darden School of Business in Charlottesville, VA, USA

Interested in learning more about options to raise capital for an acquisition where the selling business is one of the following (not exhaustive list):

- Veteran-owned
- Woman-owned
- Minority-owned

And they have contracts that are predicated on that affiliation. I myself am a veteran but am sure other searchers out there have run into this problem with other opportunities, especially in the government contracting world.

I've run into this situation now a few times:

Great business that is veteran-owned and has contracts that are dependent on the company maintaining the veteran-owned status (defined as 51%+ ownership by a veteran or group of veterans) and so they need to sell to a veteran. I've come across some targets that would be a $20 mm+ purchase price and so the $5 mm limit on an SBA loan wouldn't be enough for a single searcher to acquire the business and maintain the 51% ownership requirement.

Options I can think of:
- Non-SBA lenders, which doesn't sound great in this interest rate environment
- Pooling a group of investors who meet the criteria (in this case, veterans)

Curious if anyone else has come across this dilemma and seen creative ways to make it happen.

Reply by a professional
from Villanova University in West Chester, PA, USA

Hi ^redacted‌! We've previously structured this by providing other investors phantom equity or profits interest. This allows them to receive the economic benefits of the equity without impacting the equity makeup. Alternatively, you could have preferential returns in certain corporate structures. So, percentage interest in the company may not necessarily equate to division of distributions. I'd be happy to discuss this further.

Reply by a searcher
from Harvard University in New York, NY, USA

I would check this with a lawyer but I have seen similar arrangements in Corporate Practice of Medicine states where Doctors have to own a majority of the individual practices but the profits are swept up to a HoldCo. Maybe something like that could work for you? Though there are likely governance concerns as well.

+3 more replies.

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