What % is required to be funded by the buyer in a self funded deal?

October 07, 2019

by a searcher from Massachusetts Institute of Technology - MIT Sloan School of Management in Salt Lake City, UT, USA

I’m wondering how much “skin in the game” (in cash) banks or investors might require from someone doing a self funded deal. Or are they willing to fund the whole deal, since the buyer will likely take on a personal guarantee and other risks?

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Reply by an investor
from Western Washington University in Key West, FL 33040, USA

Depends on the bank, investors, the size of the deal, and the valuation of the deal. For an SBA loan, some banks will require 10% of the total equity injection. Some don't require any. As far as investors, this will depend on who your investors are, what your relationship with them is, the size of the deal, the valuation that you're paying, and your pro-forma financials. It's up to you to set the terms of your deal. As long as you can put together a deal that has an attractive prospective risk/return profile for your investors you can do whatever you want. After spending over a year searching with no compensation; self-funding your living expenses; self-funding due diligence and broken deal costs along the way; finding the deal; negotiating the deal; managing the closing process; setting up an entirely new operating company; personally guaranteeing the debt; and then agreeing to manage the business day-to-day going forward you can make a legitimate case that you have a lot of "skin in the game" and/or sweat equity invested...

Reply by a searcher
from Stanford University in Houston, TX, USA

SBA itself requires at least 10% of the purchase price in equity down (or at least 5%, if you have at least a 5% seller's note on full standby). As others have noted though, many of the banks still prefer at least 15% in equity down, depending on the acquisition multiple.

A separate but related topic is: of the total equity dollars being contributed (not total purchase price), how much needs to come from the searcher his/herself (and not from their LPs)? I've heard at least 10%, but others may have other data points.

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