How do you decide on terms for investors in an SBA deal?

June 05, 2021

by a searcher from New York University in Los Angeles, CA, USA

Hi everyone,
If you are doing a deal where you're only needing to raise 5% of outside investor equity, the seller is holding back 5% and the rest is your PG against SBA debt, how do you decide on an investor economics split? I know you have to give them a step up but how much?

To put some #s here, the purchase price + transaction fee is $8m, SBA gives you $5m, seller holds a note for $2m, you raise $600k from investors and the seller holds back $400k on full standby for her "equity". How would you calculate what % you should be giving investors?

Reply by a searcher
from University of California, Berkeley in Bend, OR, USA

^redacted‌ has posted quite a bit on this exact subject and has great insight. I would start with a search on his posts. You can do all sorts of things (like solve for an ownership stake that provides a target IRR), etc. But as an entrepreneur, I'd definitely offer a great premium to stack my corner with solid investors who can add value, but that's just me, some entrepreneurs only want the check and nothing else. Simultaneously, if I were the investor, I'd be very wary of the greedy entrepreneur taking every spreadsheet ownership calculation out to ten decimal places raising money. What is that relationship going to look like after closing and beyond?

Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

Is the investor coming up with 5% of $ 8 M i.e. $400 k and you $200 k for a total of $600 k? Or is the investor coming up with 5% of the $600 k i.e. $30 k, and rest $570 k is yours?

+2 more replies.

Join the discussion