Investor Terms for Family

by a searcher from Ohio State University

1 month ago

I am working on a deal with a 10% equity injection. The seller is giving a 20% seller note, and I am financing the other 70% via SBA loan. After considering many different investors, I decided to keep it in-family and only choose my mother as my only investor. I myself will be contributing 78% of the cash injection (8% of enterprise value). My mother will be contributing 22% of the cash injection (2% of enterprise value). My mother will want to give me favorable terms, and will, quite honestly, agree to anything I suggest. However, I don't want to take advantage, and I want to give her a decent investment. 

Does anyone have any suggestions on what equity amount is fair? Using % of enterprise value multiplied by a 2x step-up, I could offer her 4%. Using pro-rata of cash injected (and considering my cost of searching and due diligence), I could offer 16%. 

Also - is it commonplace to offer preferred returns, or is that unnecessary complication?

Thanks everyone for your help!

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4 comments

intermediary from Queens University of Charlotte - McColl School of Business

I'm not sure! If you send me an email to --@----.com I can forward to an SBA banking specialist in our network.

3 weeks ago | like reply | 0 likes

professional from The University of Texas at Austin - Red McCombs School of Business

Hey, I think a preferred return would not be necessary. The 2x step up is at market in terms of step up and offering say a 10% pref on top would put you at preferred share market terms overall, which would then defeat then general sentiment of friends and family capital being cheaper. I agree with Josh's comment above. I would stick with the 2x step up and not worry about a pref!

1 month ago | like reply | 0 likes

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