How will you structure a Gap Equity?

March 27, 2023

by an investor from Massachusetts Institute of Technology - MIT Sloan School of Management in Boston, MA, USA

Let's say you buy a 10m company and took a 5m SBA personal guarantee loan, and asked investors to put in 5m to cover the shortfall.

How much % equity should the investors get? What do you think?

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

You'd want to get another $2-3m of junior bank debt from your lender and then only raise $2-3m of equity from 2-20 investors (no one investor can be over 20%). The equity investors would typically get participating preferred stock with a liquidation preference. Investors would get their initial capital back plus a preferred return back first, and then would participate in remaining proceeds split something like 20-30% to the investors and 70-80% to you the searcher. The actual numbers all depend on the metrics of your deal. https://www.youtube.com/watch?v=HpWO2BAZx8A&ab_channel=LiveOakBank

Reply by an investor
from University of California, Berkeley in San Francisco Bay Area, CA, USA

The issue with raising larger equity checks is that the universe of self-funded search investors who are ok with 20-30% equity is small and the available pool of capital is very limited. Generally speaking, self-funded search works best if the equity check is small. Your best bet is likely to go with an SBA lender who does companion loans. You may be able to get up to $10M of debt, but this will likely only work with a low multiple deal that has very consistent profitability over the past 3 years. Your other option would be partnering with an SBIC fund who provides both debt and equity (typically requires $2M+ EBITDA).

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