Reflections from Rice University's ETA Conference and Looking Ahead to Chicago

Last week, I had the privilege of visiting Houston for the first time to participate in Rice University's ETA conference. The energy within the entrepreneurship through acquisition community was remarkable.

I moderated a panel discussion on buy-side financing alongside Jared Johnson of First Internet Bank, Shelley Naglieri of Comerica Bank, Jacob Hall of Kando Capital, and Tatiana Gaspar of Next Coast Legacy.

The conversation reinforced a critical truth: there's no one-size-fits-all approach to financing a business acquisition, and the most successful searchers align their capital strategy with their search model from day one.

The Fallacy of "One Size Fits All"

One of the most persistent myths in the search fund space is that there's a universal playbook for structuring your search and financing your acquisition. The reality is dramatically different, and failing to recognize this early can lead to misaligned expectations, difficult capital raises, and viable deals that fall apart due to structural incompatibility between financing sources.

The type of equity you raise and the financing you pursue should directly reflect the type of search you're running and the kind of partner you want alongside you throughout the acquisition and operating journey.

Every aspiring entrepreneur faces a fundamental choice between the following options:

Traditional Search Model: You raise a search fund from institutional investors who provide capital to fund your search expenses (typically $300,000-$500,000 over 18-24 months) in exchange for the option to invest in your acquisition. This typically leads to larger transactions ($20M-$100M+ enterprise value), conventional financing structures, and an active board of experienced investors. You take a meaningful equity stake (typically 20-30%) but not majority control.

Self-Funded Search Model: You self-fund your search expenses and piece together acquisition financing through personal capital, friends and family, and specialized investors. This path most frequently leads to SBA-backed acquisitions of businesses generating below $2 million in EBITDA and trading at valuation multiples below 5x, where you maintain majority control (51-90% ownership) and operational autonomy.

The sweet spot for SBA-financed acquisitions is businesses in the $500,000 to $1.5 million EBITDA range, trading at 3x to 4.5x multiples.

This size range exists because of a practical constraint:

Most banks that offer SBA 7(a) loans have leverage caps around $8 million in total financing (a maximum $5 million SBA 7(a) loan, plus a $3 million conventional loan, for example).

Once you're looking at businesses above $2 million in EBITDA trading at 5x or higher (enterprise values of $10 million+), you've exceeded what's possible within the SBA framework at most lending institutions. At that threshold, you're transitioning into conventional financing territory with different requirements, lower leverage ratios, and typically more sophisticated equity partners.

Neither approach is inherently superior—but they're fundamentally different, and the capital partners appropriate for each are equally distinct.

Understanding Your Capital Sources

To optimize your acquisition financing strategy, it's essential to understand the landscape of capital providers and how they think about risk, return, and partnership.

Traditional Search Fund Investors like Tatiana Gaspar at Next Coast Legacy are sophisticated investors who have backed multiple search funds. They bring valuable operating experience and networks, expect professional governance and meaningful involvement in strategic decisions, and are evaluating you on your capacity to scale a platform company. These investors typically target 3-5x cash-on-cash returns over a 5-7 year hold period.

Specialized SBA-Focused Equity Partners like Jacob Hall at Kando Capital specifically support self-funded searchers pursuing SBA-backed acquisitions. They understand the SBA regulatory environment, are comfortable with the leverage profile of SBA deals (which can be significantly higher than conventional deals), and position themselves as supportive partners rather than controlling board directors.

Critically, they understand that in an SBA deal, the entrepreneur is the majority owner and decision-maker.

SBA 7(a) Lenders like Jared Johnson at First Internet Bank and Lisa Forrest at Live Oak Bank specialize in acquisition financing backed by the Small Business Administration's guarantee program, providing up to 90% leverage.

The SBA guarantee allows lenders to provide financing that would otherwise be considered too risky from a conventional lending perspective. However, most SBA lenders cap their total exposure, combining SBA 7(a) and conventional financing, at around $8 million, creating a natural ceiling on deal size for businesses below $2 million in EBITDA trading at below 5x multiples.

Conventional Lenders like Shelley Naglieri at Comerica Bank serve the acquisition market above the SBA threshold, typically transactions where total financing exceeds $8 million. They offer senior debt (typically 3-4x EBITDA leverage), often combined with seller financing or mezzanine debt to bridge to the full purchase price. These lenders are more conservative in underwriting, require more extensive collateral and financial covenants, and generally expect to work with more established operators or institutionally-backed search funds.

Matching Capital to Model: Why Equity and Debt Must Be Aligned

Here's where intentionality becomes absolutely critical: your equity strategy and your debt strategy must be perfectly aligned. Misalignment between these elements is one of the most common reasons solid deals fall apart during the financing phase.

The SBA-Backed Acquisition Model

If you're pursuing a self-funded search using SBA 7(a) financing - where you'll maintain majority ownership (typically 51% or more) and operational control - you need equity partners who understand and genuinely embrace that model.

SBA regulations require that the operating owner maintain at least 51% ownership and that no single minority investor can exercise control over major business decisions.

Understanding the size constraints of SBA financing is crucial for setting appropriate expectations.

If you're targeting businesses below $2 million in EBITDA trading at below 5x multiples, the SBA path is typically your optimal financing solution.

The high leverage ratios, government guarantee, and specialized lenders make this the most efficient capital structure for this segment of the market.

However, if you're looking at a company doing $2.5 million in EBITDA at a 5.5x multiple ($13.75 million enterprise value), you need to recognize early that you're outside the SBA framework and must structure your equity and debt accordingly.

Investors like Jacob Hall at Kando Capital specialize in exactly the sub-$2 million EBITDA, sub-5x multiple scenario. They've structured their fund around supporting searchers who are taking the driver's seat with their own capital at risk alongside minority investors who appreciate the risk-adjusted returns of SBA-backed deals. These investors understand they won't have board control, that major decisions rest with the majority owner-operator, and that the high leverage profile is mitigated by business quality, operator capability, and the SBA guarantee structure.

Attempting to bring traditional search fund investors into an SBA-backed deal structure typically creates friction and misalignment. Traditional investors expect board representation, control over major decisions, and the ability to influence strategy. They're often uncomfortable with the leverage profile of SBA deals, may not understand the regulatory constraints, and the return profile may not meet their fund economics. This doesn't make them bad investors—it makes them the wrong investors for this specific structure.

The Traditional Search Fund Model

Conversely, if you're running a traditional search fund targeting a larger platform company - one where you'll have seasoned operators on your board providing strategic guidance, where you're targeting a $20-$100 million enterprise value acquisition, where you'll take a meaningful but not majority equity stake - then the traditional investor base makes tremendous sense.

In this scenario, you'll likely be working with investors like Tatiana Gaspar at Next Coast Legacy who have backed multiple search funds, bring valuable operating experience and networks, and can provide strategic value well beyond their capital contribution.

These investors expect regular board meetings, financial reporting, strategic planning sessions, and meaningful involvement in major decisions.

Your debt financing in this model will typically come from conventional lenders like Shelley Naglieri at Comerica Bank who understand the dynamics of institutionally-backed acquisitions, are comfortable working with active boards of directors, and have experience with the traditional search fund structure. These lenders will view your investor syndicate as a meaningful signal of quality and capability.

The key insight from our Houston panel: don't mix and match incompatible capital sources

An investor optimized for traditional search economics won't be the right fit for an SBA deal structure, and vice versa. A lender who specializes in SBA acquisitions won't be structured to finance your $50 million platform company acquisition, and a conventional lender may not understand or appreciate the dynamics of a highly-leveraged SBA acquisition.

The most successful searchers we work with are crystal clear about their model before they raise capital. They understand their target company profile, know what ownership structure they're pursuing, have thought through the governance model they want post-acquisition, and are intentional about assembling a capital structure that aligns with all of these elements.

Pioneer Capital Advisory's Track Record and Expertise

At Pioneer Capital Advisory LLC, we've built our practice specifically around helping business buyers navigate the SBA 7(a) financing process. Since May 2022, we've helped our clients close 112 acquisitions with over $240 million in SBA 7(a) financing.

This isn't just about volume - it's about the depth of expertise we've developed through seeing every possible permutation of deal structure, every edge case in SBA underwriting, and every challenge that can emerge during the financing process.

We understand the unique requirements of SBA lending from every angle. We know how to prepare your personal financial statement to present your financial position in the strongest possible light. We understand the equity injection requirements and can help you structure your capital raise to satisfy both SBA requirements and investor expectations. We've built deep relationships with the most sophisticated SBA lenders in the market and know which lenders are best suited for which types of deals—whether it's a manufacturing company in the Midwest, a service business in a major metro, or a niche industrial distribution company.

We also understand the size constraints intimately. When a client comes to us excited about a business doing $2.3 million in EBITDA at a 5.2x multiple, we can quickly identify that they're at the upper boundary of SBA financing capability and help them think through whether it makes sense to negotiate the price down to fit within SBA parameters or to pivot their capital structure toward conventional financing. This kind of pattern recognition - understanding where the natural breakpoints are in the capital markets and how to structure around them - is invaluable for avoiding wasted time and deal fatigue.

Most importantly, we serve as a translator and advocate throughout the process. SBA lending involves significant regulatory complexity, and even experienced business buyers can find themselves lost in the acronyms, requirements, and paperwork. We guide our clients through every step with clarity and precision, anticipating potential issues before they become problems, and ensuring that your financing process supports your transaction timeline rather than creating unnecessary delays or uncertainty.

Expanding Beyond SBA

While our core expertise is in SBA financing for businesses below the $2 million EBITDA, sub-5x multiple threshold, we're actively building out our non-SBA financing practice to serve clients pursuing acquisitions of larger companies where conventional senior debt, mezzanine financing, or other creative structures become the optimal path forward.

This expansion reflects a fundamental reality of the acquisition market: as searchers become more experienced, as platforms scale and pursue add-on acquisitions, or as buyers target larger companies from the outset, the financing needs become more sophisticated. Once you're looking at businesses generating $2 million+ in EBITDA at 5x+ multiples—where the total financing need exceeds the $8 million leverage cap that most SBA lenders impose—you need access to conventional lenders, mezzanine providers, and the structuring expertise to navigate a more complex capital stack.

We're building relationships with conventional lenders, mezzanine funds, and specialty finance providers to ensure we can serve our clients across the full spectrum of acquisition financing. Whether you're evaluating your first acquisition of a $1.2 million EBITDA business using SBA financing, you're considering a stretch opportunity at a $1.8 million EBITDA company that's right at the SBA threshold, or you're a seasoned operator looking to step up to a $3.5 million EBITDA platform using a combination of senior debt and seller financing, our mission is to ensure your financing strategy is not just adequate, but optimized for your specific situation.

Looking Ahead: Chicago ETA Conference

I'm excited to continue this conversation at the Chicago ETA Conference on November 19th (https://www.etaconference.com), where I'll be speaking with Lisa Forrest of Live Oak Bank, one of her former clients, and one of Pioneer Capital Advisory's former clients, Charles Miller of Cooper Demolition.

Charles successfully acquired Cooper Demolition, a specialty industrial demolition contractor, using SBA 7(a) financing. His journey from searcher to successful operator illustrates many of the principles we've discussed: the importance of finding a business that matches your skills and interests, the value of working with specialized lenders who understand your industry, the critical nature of properly sizing your target company to match available financing options, and the leverage that comes from engaging experienced advisors early in the process.

Lisa Forrest and her team at Live Oak Bank have been at the forefront of the SBA acquisition lending market for years, and Live Oak's commitment to the search fund and acquisition entrepreneurship community has helped countless searchers successfully close their dream acquisitions. Having Lisa share her perspective on what makes for a successful financing relationship, what red flags lenders watch for, and how searchers can position themselves for success will provide invaluable insights for anyone in the search process.

We'll be diving deeper into real-world case studies of how searchers have successfully navigated the financing process, what challenges emerged and how they were solved, and the lessons learned that can help the next generation of acquisition entrepreneurs avoid common pitfalls and accelerate their path to successful ownership.

If you're attending the Chicago ETA Conference, I'd love to connect in person. You can learn more about the conference and register at https://www.etaconference.com/.

How Pioneer Capital Advisory Can Help

At Pioneer Capital Advisory, we work with business buyers at all stages of the business buying journey. Whether you're:

• Pre-LOI and exploring your financing options, building lender relationships, or structuring your equity raise
• Post-LOI and navigating due diligence, SBA underwriting, or finalizing your capital stack
• Post-closing and considering add-on acquisitions or refinancing strategies

We're here to help ensure your financing strategy is optimized for your specific situation.

Ready to discuss your acquisition financing strategy?

Schedule a complimentary consultation with our team:

https://www.pioneercapitaladvisory.com/

With 112 successful acquisitions and over $240 million in SBA financing closed since May 2022, we've developed the pattern recognition and lender relationships to help you navigate this process with confidence.

Taking Action: Key Questions for Aspiring Searchers

If you're currently evaluating entrepreneurship through acquisition, here are the key questions you should be asking yourself right now:

1. What model am I pursuing? Am I raising a traditional search fund, or am I self-funding my search? This decision will cascade into every other aspect of my strategy.
2. What's my target company profile? Am I looking for businesses below $2 million in EBITDA trading at below 5x multiples where I can use SBA financing and maintain majority control, or am I targeting a larger platform where I'll need conventional financing, will have institutional investors, and require a more sophisticated capital structure?
3. Do I understand the financing constraints of my target size? If I'm focused on the SBA path, am I comfortable limiting my search to businesses that fit within the approximately $8 million total financing cap that most SBA lenders impose? Or am I willing to target larger businesses knowing that I'll need to structure conventional financing and raise more equity?
4. What kind of partnership do I want post-acquisition? Do I want active board members providing strategic guidance, or do I want supportive minority investors who trust me to drive the business?
5. What's my financing strategy? Based on my target company profile and desired ownership structure, what debt structure makes sense? SBA 7(a)? Conventional senior debt? Some combination? And importantly, do I understand where the natural breakpoints are in the capital markets?
6. Who are the right capital partners for my specific model? Am I talking to investors and lenders who actually specialize in my chosen path, or am I wasting time with sources that aren't aligned with my structure?

​

Matthias Smith​
Founder, Pioneer Capital Advisory LLC
​matthias@pioneercap.com​
​https://www.pioneercapitaladvisory.com/

Ready to Have a Real Conversation About Business Buying?

If you're serious about acquiring a business and want to work with people who'll give you the straight truth (not social media fantasies), we'd love to connect with you.

For pre-LOI buyers ready to explore opportunities: Schedule a meet & greet call

Already have a deal under LOI and need financing help: Schedule an LOI consultation

Got questions or just want to chat? Drop me a line directly at matthias@pioneercap.com

Disclaimer: The information in this newsletter is for informational purposes only and should not be considered legal or financial advice. Business buyers are encouraged to consult with their legal counsel and accountant to ensure the proper structuring of their transactions and to fully understand the tax implications of seller financing.

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