Gap Equity Investor Exit Options

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September 12, 2022

by a searcher from California State Polytechnic University - Pomona in Pomona, CA, USA

On searches involving gap equity, where the operator plans to stay with the business long term and not exit with the investors, what are exit strategy options? How have people structured these deals so the investors can exit without a sale of the company?

I assume one option is to assess the enterprise value at that time and buy out the investors?

Interested in hearing about other way to structure a deal like this knowing that the operator plans to stay with the business for a longer term.

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Reply by a searcher
from California State Polytechnic University in Pomona, CA, USA
I am thinking in terms of a self funded search in which the gap equity consists of 10%-30% with the remainder of the purchase via and SBA loan. From my research it seems that this capitalization structure is considered the norm as it flips the model from a traditional search.

SBA 7a loans are for 10 years, of which time I don't believe equity investors can be removed from the equity portion, but I may be incorrect in that thinking. Doesn't the SBA loan have to be serviced in full first?

Do gap equity investors for self-funded search in which lending is utilized for the main capital portion expect to stay onboard with the investment for 10 years? If so, that is great, but wondering if an option for them to exit from the investment is needed before the 10 year period.
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Reply by a searcher
from Northwestern University in Chicago, IL, USA
Are you thinking about this before acquiring, or is this a predicament you find yourself in? If planning ahead of time (I'm not a lawyer, so not sure about the paperwork btw). If planning ahead of time, you could have a handshake agreement and buy it out the price that would give them xx% return after Y years. You could plan to do a management buyout and recapitalize at that time. Or as you mentioned, you could just get the price assessed and buyout that piece of the equity. Note: this will be easier with fewer investors.
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