Seeking Advice on Fair Deal Structures for SBA 7a Deals with Investors

May 08, 2023

by a searcher from University of North Texas in San Antonio, TX, USA

I'm in the process of acquiring a business through an SBA 7a loan, and I'm considering bringing on an investor to help fund a portion of the deal. I'm looking for advice on fair and reasonable deal structures that could work for both myself and the investor.

Based on my research, I've learned that a typical SBA 7a loan could be structured with 75% from the loan, 15% from a seller note, and 10% from equity (from investors). I'm interested in hearing from anyone in the community who has experience with SBA 7a deals and can offer insights into how to structure deals with investors that are fair and beneficial for both parties.

Specifically, I'm wondering if anyone has experience with investor terms similar to the following:

-20% common equity -10% preferred return -Liquidation preference (investors get their money back before any proceeds get split up among the common shareholders)

If anyone has experience with similar investor terms or has alternative suggestions for fair deal structures, I would greatly appreciate any insights or advice.

Thank you in advance for your help and input.

Reply by a professional
from University of Michigan in Dallas, TX, USA

Hey ^redacted‌, we represent buyers using SBA loans in most of our transactions, many of which involve outside investors, so we see these deals a lot.

Generally 2 classes of equity. Preferred (cash investors, which may also include the searcher) gets a priority return of capital after a pref of 8-12%. Pref also gets a step up of between###-###-#### 5x, though we sometimes see 1.0x (no step up) but that's usually only when the investors are friends and family. Searcher gets the balance of the economics as common, no catchup.

Generally very few rights other than standard minority protections. Occasionally where there's searcher appetite, the buyer will have a board and the larger checks will get a board seat.

I'd say this is the structure 90% of the time in self funded with outside investors. Hope that helps!

Reply by a searcher
from University of California, Berkeley in San Francisco, CA, USA

^redacted‌ thanks for the tag! This may not be a popular answer but here it is: Regardless of what your lender allows, 10% is considered thinly capitalized in general corp finance or business. You can look across publicly-traded companies, CRE and present day PE/LBO deals as a gauge on BS leverage. Investors look for risk-adjusted return of 20-40% depending on industry, thesis, team, structure etc with (in the case of SF deals) very little if any protection or practical preference. Knowing what the other side is solving for should guide you in an optimal structure rather than a max'd debt and min dilution structure.

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