SBA Equity Maximum
March 04, 2025
by a searcher from Indiana University, Bloomington/Indianapolis - Kelley School of Business in New York, NY, USA
I'm under exclusivity on a self-funded search acquisition and raising ~$1.5M of equity through a preferred/common structure standard in the self-funded world. The preferred investors would convert into ~30% of the common equity, while I retain 70%. I have a few family offices interested in investing and am trying to figure out what the maximum equity investment is per investor without them having to co-sign a personal guarantee. I'm getting very different responses depending on who I talk to and the SBA lender does not know for sure quite yet.
Is the 20% maximum threshold per investor dependent upon the common equity or is it based on the equity dollars invested (i.e. the preferred class)?
For simplicity, let's just assume I'm not investing anything and $1.5M is total amount of equity investment in the business. If it is based on the common equity ownership, it would imply one single investor could invest up to $1.0M without having to sign a personal guarantee ($1.0 max investment / $1.5 total equity = 2/3 of Investor Common Equity x 30% Pref Conversion = 20% Common Equity). If it's based on the total dollars invested, it implies the maximum equity investment from one investor is $300K. I have been told both from various people including SBA lenders, loan brokers, equity investors, lawyer, etc.
Any views on this would be appreciated.
from University of Tennessee in Nashville, TN, USA
SBA requires 10% Equity of the total transaction (purchase price + fees + costs) for most transactions, albeit with variations.
1) You can have straight Buyer 10% down.
2) You can have rollover equity count towards the full 10% equity as long as the Seller is staying in the business. The Seller may be required to sign a PG in addition to the Buyer.
3) You can have the Seller accept a 2-year interest-only then 8-year fully amortized Seller note (total loan period must match the SBA amortization period) and put only 2.5% down.
4) You can have the Seller accept a 2-year full standby then 8-year fully amortized Seller note (total loan period must match the SBA amortization period) and have it count towards the full 10% equity.
The lone hard exception to Buyer equity injection by the SBA is if you are an existing business buying another business for expansion.
HOWEVER, the SBA Lender will always have their additional requirements and restrictions when underwriting the loan and most of the SBA lenders have not warmed up to a Buyer putting less than 5% down, despite the SBA allowing it under different scenarios. Lenders still cling to the notion that something must be put into the transaction as a sign of 'skin in the game'. To them, signing a personal guarantee pledging all your assets as collateral for a federal government agency-backed loan is not tangible enough.
I would recommend that you speak with different SBA lenders on this platform as well as the loan brokers. The SBA lenders offer only their institution's version of SBA lending, while the brokers have a network of lenders from which to choose. Additionally, as has been advised in other posts, it is a good idea to work with 2-3 SBA lenders when approaching a deal to see which one offers the most beneficial term sheet. The same deal with the same facts is evaluated differently at each institution.
Finally, SBA lenders and brokers aren't your friends; they are your vendors. Price, terms, and timing aren't the factors restricted to LOI negotiations, they are also pertinent for every vendor relationship that will be involved in the transaction, especially your financiers. They're in business just like you hope to be and should be respected but managed accordingly.
from Durham University in London, UK