Upcoming Event

I'm co-hosting an ETA Happy Hour with Chris Barrett, CPA of Midwest CPA on Thursday, August 20 from 4:00 to 7:00 PM Central at Wisconsin Brewing Company, 1079 American Way, in Verona.

This event is built for people already living in the ETA world and for anyone who has started to wonder, quietly and maybe a little seriously, whether owning a business beats renting a seat in someone else's. Searchers, operators, investors, and the merely curious are all welcome, and for any current or prospective buyer, the first three drinks are on Pioneer Capital Advisory and Midwest CPA.

​Reserve Your Spot​

Almost every buyer who calls me is braced for the wrong fight.

They arrive certain the hard part will be qualifying the business. So they pour their anxiety into the cash flow, the debt service coverage ratio, the three years of tax returns they're sure some underwriter is going to shred.

That worry isn't wrong, exactly. It's just mostly wasted, because the business is already what it is. The numbers either carry a loan or they don't, and any advisor worth paying can tell you which inside a single phone call.

The thing that actually kills deals is the question buyers spend the least time on before they sign. It's quiet, unglamorous, and it decides everything.

Where does the equity injection come from?

I was on a call recently for a beloved local retailer, the kind of place a town builds part of its identity around. Motivated seller.

A customer base that didn't just shop there but showed up for the place. Working with a buyer that every person on that call, myself included, genuinely wanted to see win.

By every soft measure, the feel-good deal you hope lands in your inbox. And the entire transaction, all that goodwill and momentum, collapsed down to one question: The 10% down; where on earth it was going to come from?

First, size the number honestly. It's bigger than you think.

The SBA requires a minimum equity injection of 10% of total project costs. Read that phrase slowly, because the word buyers skim right past is total.

This is not 10% of the purchase price. It's 10% of everything: the business, the working capital you fold into the loan, the closing costs, the guaranty fee the agency charges for standing behind the debt.

On a deal where you finance working capital and roll the fees in, the real injection can run well north of what a buyer scratches on a napkin. Get this number right before anything else, because every branch that follows grows out of it, and a mistake here quietly poisons all three.

Because there are exactly three sources for that injection.

Branch one: Your own cash.

The cleanest road there is. If you can write the full injection out of your own liquidity and still walk away from the table with a real cushion intact, you hold the strongest hand available to any buyer in this market.

But a lender doesn't just want to watch you make the injection. It wants to see what's still standing in your accounts the morning after.

Post-close liquidity is a genuine underwriting variable that lenders care a lot about.

The lender is underwriting your durability; your capacity to eat a slow first quarter or a furnace that dies in January without missing a payment.

Branch two: A seller note, and the standby rule that now governs it.

When the cash won't stretch to cover the whole injection, a seller note has long been the bridge across the gap. Under current SBA rules it still can be, but only when it sits in full standby, and full standby means exactly what the words say. Not a dollar of principal and not a dollar of interest reaches the seller until your SBA loan is retired in full.

But there's been a change recently: The standby period is no longer the two years sellers half-remember from the deals their golf partners did a few seasons back. Under SOP 50 10 8, a seller note used to meet the injection must stand by for the full term of the SBA loan. That term is typically ten years.

A seller in their mid-60s who signs a full-term standby note is agreeing to wait until their mid-70s to touch that money, and to receive it, when it finally arrives, in dollars a decade of inflation will have quietly hollowed out.

"I don't want this money when I'm 74" is not an unreasonable thing to say.

What you bring to that wall is structure.

Negotiate an acceleration clause so the note comes due the moment the buyer refinances the SBA loan, an event that frequently arrives well before year ten, and you hand the seller a real path to payment measured in human time rather than in actuarial tables.

Full standby attaches only when the seller note is being counted toward your equity injection. If the note is ordinary seller financing and is not being used to satisfy the down payment, that full-term standby requirement does not bind it the same way, and the note can carry a far more workable payment posture, subject to the lender's comfort. B

Branch three: Raising equity from investors.

This is where the most expensive misunderstanding in the entire process makes its home, and it's the reason I sat down to write this edition.

Buyers assume, almost as a reflex, that a business which is loved (like my example from earlier) will be a business that's easy to raise money against. But that's not always the case.

The investors who fund SBA search acquisitions run on a specific and fairly consistent thesis.

As a class, they're drawn to businesses that are:

• Asset-light
• B2B
• Built on revenue that recurs without being re-sold every month.
• The durable essential trades: HVAC, plumbing, electrical.
• Run by an operator with a proven playbook for professionalizing a business.

Matching the kind of business you're buying to the kind of investor who actually funds that kind of business is step zero of any raise, and it's precisely the step nearly everyone skips.

Find the right investors, though, the ones whose thesis genuinely fits the business in front of you, and the mechanics become their own conversation. A good one to be having.

Three things to keep in mind when raising money from investors:

1. Keep any single investor beneath 20% ownership, and understand this is not a preference but a line with teeth. At 20% or more, the SBA obliges that person to sign a personal guaranty on the loan, and the average passive investor has exactly zero appetite for guaranteeing your acquisition debt.
   ​
2. Use an equity step-up to reward the money that shows up early and in the dark, before the outcome is knowable. An investor who commits $50,000 might be granted a two-times step-up, so their contribution is treated as $100,000 of entry value when the equity is finally carved up. It's compensation for taking the earliest and least comfortable risk, and it gives you a clean, defensible way to reward the people who believed first.
   ​
3. Layer in a preferred coupon so the opportunity stops being a pitch and starts being an instrument. A preferred return somewhere in the range of 8% to 14% lets investors share in the cash flow on defined, predictable terms, and defined, predictable terms are what actually get funded. Vague upside gets admired at dinner parties. Structured returns get wired.

A word on the ground shifting under all of this.

If you've followed the trade coverage, you know the SBA tightened its standard operating procedures under SOP 50 10 8, and the revisions reach into several of these branches.

The 10% buyer equity requirement is firmly back. The seller-note standby period stretched to the full term of the loan. And equity rollovers, where a seller keeps a slice of the business after the sale, got dramatically harder to run.

Under the current rules a seller who retains any stake at all, however slight, is treated as an ongoing owner, must personally guarantee the entire loan for at least two years, and the transaction must now be structured as a stock purchase rather than an asset purchase.

I've been on the record about where that goes wrong, and I'll say it plainly again here.

Asking a seller who keeps a small minority position to guarantee the full loan amount is the point at which the agency overreached. A pro-rata guarantee, one under which a departing owner stands behind only the share s/he actually retains, would be the commercially reasonable version of the very same instinct toward safer lending.

Until that view prevails, the practical consequence for buyers is unambiguous. The old, useful habit of keeping the seller on as a minority owner, whether to hold a trade license active or simply to steady the business through the handoff, now arrives freighted with a full personal guarantee and a stock-purchase structure that drags the entire legal history of the company, hidden liabilities and all, onto your own books. None of that is automatically fatal. But it's a real speed bump, and it belongs in your planning on day one, not your surprises on day forty.

Why walking the tree early changes everything.

Each branch dictates a different negotiation. That's the whole reason to know which one you're standing on before you sign the letter of intent, rather than discovering it afterward when your leverage has already drained into the floor.

Lean on a seller note for part of your injection, and the seller's willingness to sit in a full-term standby is not a detail to reconcile later. It's a core deal term, and it belongs in the first conversation about structure, while everyone is fresh and nothing is yet sunk.

Count on an equity raise, and whether your target actually fits the available pool of capital is the entire distance between a plan and a wish, so test that distance before you commit, not after. Go all cash, and your post-close reserves may quietly steer you toward a different tier of lender, so know the size of your cushion before you choose your bank.

The buyers who close are almost never the ones holding the most cash. They're the ones who knew which branch they were standing on before they signed a thing, and who built the entire deal around that knowledge from the first handshake. The buyers who stall are the ones who fell in love with a business first and went looking for the 10% afterward. In that order. And the order is the whole problem.

Thanks for reading!

If you're working on an acquisition, or are in the pre-LOI phases, you can book a short, informal call here to meet our team and learn how we can help 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​

Independent sponsors on a non-SBA deal (pre-LOI): Schedule a financing call with Rafael​

Independent sponsors with a deal under LOI: Schedule an under-LOI call with Rafael​

Until next time,

Matthias Smith

President, Pioneer Capital Advisory

​www.pioneercapitaladvisory.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.

Thanks for reading. Feel free to reply directly to this email with any questions or thoughts.