Seller Equity Rollover with an SBA Deal?

April 12, 2023

by a searcher from Rice University - Jesse H. Jones Graduate School of Business in Tampa, FL, USA

Does anyone know of a creative but proven to work structure to keep a seller onboard as an operations manager, and roll over ~20% equity, with an SBA deal? Feel free to DM me.

Appreciate your thoughts!
M

3 Likes

33 Replies

423 Views

Replies

Reply by a professional
from Villanova University in West Chester, PA, USA

Hi ^redacted‌! Great news that the SBA is changing their requirement. You may still want to explore other options that better suit your current needs and long term goals. A few other ways this can be structured is (i) note/debt subordinate to the SBA loan - forgive-able, non-forgivable with a lot of creativity in terms as stated in a few comments above, (ii) phantom equity - they have an interest that acts like equity without being equity - can have vesting requirements and periods, (iii) employment for a short period, consulting, or transition services agreements, (iv) earn-outs, or (v) profit sharing plan. All of these can be mixed and matched and highly customized. I've represented a number of clients using creative solutions such as these and would be happy to discuss this further.

Reply by an intermediary
from Washington University in St. Louis in Chicago, IL, USA

I cannot speak to what is allowed with SBA, but in general I find that an incentive based on revenue targets (could structure as earnout or bonus depending on other structure and employment questions already addressed by others), or margin (% of margin or bonus / earnout based on targets) would align incentives. In general, with a post-transaction arrangement, I tend to favor revenue rather than EBITDA or margin targets because you don't want to be in the position of arguing about investments you may want to make in the business. You can of course control for those in the calculation, but especially if you don't have a finance team or advisor to support those calculations, that gets more complicated and opens up negotiation about what is in or out. Revenue targets, while they do run the risk of incentivizing unprofitable growth, are much more straightforward.

+31 more replies.

Join the discussion