Equity capital for SBA funded deals + Solution to Personal Guarantee risk

We would like to get the community's feedback on the following idea. We are considering raising a fund (lead investor is in place) that would invest in self-funded searchers and independent sponsors who use SBA loans for acquisition purposes. The idea is to make it easier to finance good deals while reducing the personal liability risk from the SBA personal guarantee requirement.

Here is how it would work:

• The fund would partner with talented searchers and independent sponsors
  - The fund provides all of the equity capital required for a deal
• The fund would co-sign the SBA personal guarantee
• The fund would indemnify the searcher for any personal guarantee risk above $500k. For example, if the remaining balance of the SBA loan at the time of default is $4M, then the fund would be responsible for $3.5M and the searcher for $0.5M of the loss. This structure ensures alignment of interests without putting catastrophic risk on the searcher in a downside scenario.

Other Terms:

• The details would depend on the specific situation and equity check size, but for a typical deal the searcher would generally receive common equity equivalent to 50% of the upside. Independent sponsors would receive the difference between 50% and an attractive CEO equity package.
• There would be a 20% preferred return with a catch up after the preferred return hurdle is reached. While 20% is high, it is needed to guarantee sufficiently high returns to risk capital investors who also assume the PG indemnification risk.
• In case of a default on the SBA loan, the equity of the searcher would be reduced to zero.
• Excess cash flow (above SBA debt service and company investment requirements) would be used to first repay the SBA loan and then equity capital.
• The Fund would partner with searchers shortly before an LOI is signed and share 50% of the QofE cost

General deal criteria:

• Industry agnostic
• $0.75 - $3.0M EBITDA
• ###-###-#### 5x EBITDA multiples
  - $0.5 - $2M equity check size
  - High quality, low risk companies (e.g. no customer concentration, no recent revenue decline, etc).

Fit: Ideal for searchers and independent sponsors who want to own a large equity stake without taking on the full risk of an SBA personal guarantee.

Please post your feedback in the comments section below. This will help us refine the structure described above.