A framework for searcher terms when using an SBA loan

searcher profile

January 13, 2019

by a searcher from University of Pennsylvania - The Wharton School in 42111 Avenida Alvarado #2c, Temecula, CA 92590, USA

Has anyone closed on a deal, or come close to closing, using an SBA loan where the searcher is signing a personal guarantee? If so, what sort of framework did you use to determine searcher terms with investors regarding equity and carried interest with specific regard to how those terms with a personal guarantee differ from a "traditional" search where a personal guarantee is usually not on the table? A framework for approaching this or examples and lessons learned would be much appreciated. Thanks!

Best,
Arleigh


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commentor profile
Reply by a searcher
from The University of Chicago in 2122 W Le Moyne St, Chicago, IL 60622, USA
This seems to go one of two ways, depending on your and your investors' preferences:
1) Pay a high preferred coupon to your investors (~12-14%) and vest most (~70%) of the equity yourself.
2) Pay a lower preferred rate and vest a lower amount of equity similar to funded search economics.

My impression is that having the deal in-hand, plus your willingness to personally guarantee the debt significantly increases your negotiating position vs. agreeing to terms prior to searching. I would think about your long-term objectives and the individual deal characteristics as to how much equity you'd prefer to hold vs. coupon it can support.
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Reply by a searcher
from Georgia Institute of Technology in Kansas City, MO, USA
Another perspective is how many investors you have and how much they will be investing. The consideration here is that no outside investor will want to own 20% or more of the equity since that investor would then be required to guarantee the note as well. We recently closed a deal that sounds similar to what Scott H. described above and would be open to chatting.
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