Let me give you the short version of structuring a self-funded SBA acquisition in 3 minutes

You're buying a $1.4M EBITDA company for $6M with 80% SBA senior debt, 10% seller note, and 10% equity

You have to raise approximately $600K of equity to get the deal done

This is called the 80/10/10 SBA structure

You personally put very little money into the transaction

You will find SMB investors (like myself) and offer them participating preferred equity instrument to fund the 10% equity

This means you have to pay back investors and offer them a return on their investment first before you distribute any profit

Then after that, you get 70%+ of the cash flow (of a business you put very little personal money into)

It's insane but it works, still blows my mind to this day

And these investors are making great money as well (underwriting to 35%+ IRRs)

But there's a very tight balancing act...move too far from what market terms are and your deal will die quickly and you'll be left without options, plus I hate unfair deals so I'd prefer to see less of them

Now let's jump into the 4 key terms (there are more, but these are the biggies)

Searchfunder member

Self-funded step ups range from 1.0x to 3.0x depending on a variety of factors: competitiveness, business quality, deal structure, growth prospects, etc. I would peg the mid point of market self-funded step up to be 2.0x assuming a close to ideal structure of debt and equity.

2. Liquidation preference

Market is 1.0x. A liquidation preference of 1.0x means that the equity investors are entitled to receive their initial investment before the common shareholders receive any distributions. Investors with a liquidation preference have a priority claim on the company's assets over other the acquisition entrepreneur who will hold common shares.

Searchfunder member

Market is 8% - 14%. A preferred return, also known as a "hurdle rate" or "priority return" is the rate of return that investors are guaranteed to receive before any profits are distributed to the acquisition entrepreneur (the common shareholder). This is necessary in order to align incentives and provide a base floor of return for investors. Given general interest rate increases, there has also been an increase in the preferred return rates offered.

Searchfunder member

Market is $60-$125K. Salary is probably the most dicey term that I rarely see negotiated (to the benefit of acquisition entrepreneurs). I’ve seen upwards of $250K attempted by some aggressive acquisition entrepreneurs. A $150K acquisition entrepreneur salary on business that generates $450K of EBITDA of makes no sense as both an entrepreneur and an investor. The goal is for the acquisition entrepreneur to pay their rent/mortgage, food, child care, and not much more. I've seen acquisition entrepreneurs take less upside carry in exchange for higher base salary which is totally appropriate and possible, just depends on the situation. No one size fits all.


When a deal is aligned between the acquisition entrepreneur and investors, it really works: An exceptional company bought, and many multiples of an investors money returned to them, while creating significant wealth for the acquisition entrepreneur

These are my perspectives as both an entrepreneur and passive investor in many self-funded SBA deals. My desire is for more good deals to get done across the ETA community (ones that benefit both investors & searchers). Bridging this knowledge gap is fun & important to me. Hopefully this has been helpful.

The 15 minute, more detailed version of this post (w actual deal structuring examples) can be viewed here.