Lenders for minority buyout

December 08, 2023

by a searcher in Chicago, IL, USA

I have a question related to buying a minority stake in a business.
Are minority stakes easier to fund via banks, or do banks generally stay away from them?
I have an opportunity to acquire a 33% stake in a plastics manufacturing company achieving $3.7MM EBITDA
and I'm wondering whether banks would fund the transaction and whether I would still be required to
bring the same amount of equity to the deal as if I was acquiring 100%?

Thank you

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

Great question. Usually the biggest challenge with acquiring an ownership interest in a business is the fact most traditional lenders want to be the priority lien holder on all of the business assets or they will not make the loan. Often times it can be hard to get the other owners of a company to agree to allow one Bank to have the priority lien on all of the business assets. Most lenders will not fund deals without hard collateral.

With the recent changes to the SBA 7A loan program, you can do a partial acquisition of an ownership of a business and fund it with the SBA 7A. You would need to bring 10% equity on the portion of the business you are buying. So if the business is valued at $1 million and you are buying 33% or $333,000 of that business, you required equity contribution would only need to be $33,000. The Bank loan does not need to be the priority lien on the business. It can be secondary behind other Bank financing the business already has (like a line of credit or existing equipment financing). However, if any of the sellers will continue to own 20% or more of the business, they would be required to guarantee the SBA loan as well. In essence they are taking on the responsibility to be sure the company can repay the loan as well.

If you would like to discuss options I would be more than happy to do so at any time at redacted Good luck.

Reply by a lender
from University of Florida in Dallas, TX, USA

All great commentary and insight here. While a minority buy-in is eligible now through the SBA, previous comments outlined the lack of feasibility if an existing owner is keeping greater than 20%. The SBA requires those individuals to personally guarantee the note, which will almost never happen.

Conventional lending will likely be your best bet; however, conventional lenders are requiring significant equity injections at this point in time###-###-#### % down) and a robust Personal Financial Statement, along with most likely at least one personal guaranty.

Any traditional banking route will require a corporate guaranty by the company.

Unfortunately, there are not great options available. If the 33% stake is owned by an exiting partner, a seller note to that individual(s) will likely be your best bet. As always, private debt should be your very last option given the unfavorable terms.

If you want to talk SBA, shoot me an email redacted

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