SBA / Debt payments as distributions?

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August 25, 2020

by a searcher from Brigham Young University in Kahului, HI, USA

When structuring a self funded search / independent sponsor deal funded with maximum SBA debt, obviously the intent is for the sponsor to retain as much equity as possible, Moving forward, how have you seen those debt service payments treated?

Are they treated the same as in a traditional single owner business or as distributions since they are essentially covering sponsor debt? i.e. - Does the equity partner receive a monthly distribution to match the DSC in their pro rata share?

My assumption is this is up for negotiation but I would be curious as to how it has worked for others.

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commentor profile
Reply by a searcher
from University of Pennsylvania in Miami, FL, USA
I would say this is never up for negotiation. Debt is debt....not a distribution, and distributions are generally in accordance with equity ownership - although they can be different according to the operating agreement. Investors will be able to realize significant returns as a result of max SBA debt (and the associated personal guarantee which sponsor provides). So everyone wins.

Also the the amount of debt secured is determined by the cash flow and assets of the entire business...not sponsor portion.

Hope this helps!
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Reply by a professional
from Walsh College of Accountancy and Business Administration in Detroit, MI, USA
Not sure I understand the question completely, but the best structure is one where the debt is inside of the target. This allows repayment from operational cash flow. Most banks require the debt inside the target entity too. Glad to discuss live if you want to email me at redacted to set up a call.
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