Congrats. Your entrepreneurship-through-acquisition journey paid off. You found your target acquisition company. LOI accepted. SBA loan pre-approval secured. You’re ready. Congrats. Being a self-funded searcher is hard, and now you’re almost at the finish line.
Now, the last hurdle to get your deal closed is here.
You have to find equity gap funding from investors to fill out the required equity injection for your deal. The SBA requires at least a 10% equity injection (and frequently more).
Where will you find these SBA co-investors? How do you find someone who understands how good of an opportunity acquiring an SMB can be. Don’t worry. I get it, and you’re not alone. Luckily, there is a list of investors who understand your asset class and are happy to invest in good deals.
Top 9 Equity Gap Investors to Bridge Your SBA Loan Funding Gap
Here is a list of nine investors to complement your small business SBA loan. When you’re looking for equity check investments in the $100k-$2m range, check them out.
- CapitalPad – The one-stop shop platform
- Travis Jamison – Smash.vc
- David Page – Post Trellis Ventures
- Ben Tiggelaar – Bardo Capital
- Sam Rosati – Pursuant Capital
- Chris Hartman – 12 South Capital Partners
- Adam Keesling
- Kaustubh Deo – Blooma Tree
- Max Spiegel – Percolate Holdings
- Rich Jordan – Strongpoint Services
CapitalPad
CapitalPad is a solid solution for many deals.
Instead of needing to cold email dozens of potential investors, send dozens of NDA’s and memos, and take dozens of zoom calls, CapitalPad it a platform that shrinks all of this down to one simple place.
CapitalPad is a platform connecting searchers (acquiring an SMB) with investors looking to allocate to this asset class.
Advantages:
- 100% free for any deal sponsor to list.
- Fund your deal in only one place. CapitalPad automatically handles connecting you with investors, NDA management, deal memo management, signatures, and funding. No back and forth.
- One single entity for signing documents, for wire transfers, and for reporting.
- CapitalPad pools all investors into one SPV (a dedicated LLC) in order simplify the process. As a searcher, you only need to deal with the CapitalPad manager instead of a handful of scattered investors.
Disadvantages:
- Currently about the maximum that a sponsor can raise in any deal is about $1million from CapitalPad.
It’s free for sponsors to use.
Learn more at CapitalPad.com
Travis Jamison – Smash.vc
Travis Jamison, owner of Smash.vc, isn’t your typical investor. He’s a blend of entrepreneur and investor, seamlessly transitioning between the two roles based on the opportunities that arise.
Starting out as a “serial entrepreneur,” Travis founded roughly a dozen small businesses, all bootstrapped, with exits of $10M+ in his portfolio. He’s then moved into providing equity capital for small businesses using an SBA 7(a) loan, and formed the investment company Smash.vc. His investing philosophy has been shaped by his hands-on experience in building businesses from the ground up.
Searchers looking for funds from a hands off investor with plenty of entrepreneurial experience should pay attention.
David Page – Post Trellis Ventures
David Page is an investor, entrepreneur and VP of Sales at two high growth technology startups. He searched for and acquired a Bay Area private vines and wines company several years ago and has scaled it multiple times over. He now runs the search investment firm Post Trellis Ventures.
He’s now focused on investing in and supporting acquisitions, offering minority equity stakes in leveraged buyouts. His investments span a variety of sectors, and he offers both financial support and the benefit of his extensive experience and network to SMB entrepreneurs and fellow investors.
Searchers with signed LOI deals looking to supplement their SBA loans should get in touch.
Contact: Methods listed at posttrellisventures.com.
Ben Tiggelaar – Bardo Capital
Bardo Capital is an investment firm led by Ben Tiggelaar. They focus on independent sponsors and self-funded search entrepreneurs, aiming for long-term ownership and sustainable growth.
They invest in businesses that have recurring or predictable revenue over $5M, are profitable with over $1M EBITDA, show consistent growth, have a diverse customer base, and offer niche or differentiated products or services.
Sam Rosati – Pursuant Capital
Pursuant Capital is a company founded by ETA entrepreneur Sam Rosati. It buys and grows small businesses with the intent of never selling. Sam is also the guy behind SMBash (the small business investment conference), as well as SMB Law Group.
Pursuant Capital is headquartered in Tampa, Florida and invest in searchers and small businesses located throughout the United States. Investment criteria typically is in companies with annual revenues of $3-30 million that are in “Old Economy” industries that aren’t sensitive to economic cycles.
Contact: https://www.pursuantcapital.com/#contact
Chris Hartman – 12 South Capital Partners
12 South Capital Partners, co-founded by Chris Hartman, is a private investment partnership that focuses on supporting acquisition entrepreneurs and business owners. Chris has a background at JP Morgan Chase and a long career as a US Army Officer. He’s currently an SMB operator in industrial services after completing a self-funded partner search.
12 South Capital Partners specializes in providing equity funding for business acquisitions, facilitating company transitions through buy-outs, management partnerships, and growth capital.
Contact: Contact — 12 South Capital Partners
Adam Keesling
Adam Keesling left his job as a newsletter writer to explore the searcher path, focusing on acquiring digital businesses. He ran a search fund in 2021, but ultimately didn’t close a deal.
Despite not buying a business initially, he learned valuable lessons about the challenges of finding good deals and the importance of leveraging expertise in business acquisition.
He now invests in apps building on software ecosystems and B2B media, guided by his experiences and the insights gained from this endeavor. Searchers in those industries with SBA backed loans should get in touch.
Contact: Methods listed at About (adamkeesling.com)
Kaustubh Deo – Blooma Tree
Kaustubh Deo, originally from New York’s private equity sector, made a significant career shift by purchasing a $2 million tree business in Seattle over a year ago. His story, featured on Acquiring Minds, explores the contrasts between private equity and owning a business, particularly in the trades sector like HVAC, plumbing, and landscaping. Deo brings an intellectual curiosity to his role, offering insights into the life and challenges of a business owner in a specialized industry.
He’s interested in supporting searchers working on tree service deals (away from Seattle metro), either as an investor or an industry guide.
Contact: Through bloomatree.com or kd [at] bloomatree [dot] com
Max Spiegel – Percolate Holdings
Max Spiegel is a former M&A banker and tech entrepreneur, and co-founder of Percolate Holdings, which he runs with Amir Learner. Prior to founding Percolate Holdings, Max and his partners sold Student Loan Hero (a platform that helps borrowers manage and repay their student loans) to LendingTree. As an investment banker, he advised on billions of dollars in M&A and capital raising.
Max currently lives in Needham and can sometimes be found hacking it on the golf course while listening to searchers pitch him their business plan.
Contact: https://www.percolateholdings.com/#contactus
Rich Jordan – Strongpoint Services
Rich Jordan is a former marine turned business operator through ETA. He primarily invests in HVAC companies and similar small businesses in North-Eastern USA.
Before entering the business world, Jordan was an engineering student at Rutgers and then served as an officer in the Marine Corps. Post-service, he ventured into real estate, where he successfully managed and grew the value of an 18-unit apartment building. Jordan then turned to small business ownership, applying his leadership, operational, and strategic skills to invest in Garon T Plumbing. He managed to grow revenue 60% in only 8 weeks of ownership. Here’s Rich telling about his journey investing in HVAC on the Think Like An Owner-podcast.
He might be a good fit if you need an investor to supplement your HVAC company small business loan.
Contact: Strongpoint Services (realstrongpoint.com)
SBA and The Funding Gap Problem
In the world of entrepreneurship and small businesses, securing the right financing can mean the difference between success and stagnation. Small Business Administration loans have long been a cornerstone for startups and small businesses in need of capital. Backed by the U.S. government, these loans provide vital funding at favorable terms, helping businesses launch, expand, and thrive.
Unlike conventional business loans that may have stringent requirements, this type of small business loan is designed to assist those who might find it challenging to qualify for traditional financing.
The government guarantees reduce the lender’s risk, often translating into lower interest rates and more flexible repayment terms.
Even with the support of SBA loans, small businesses often encounter a funding gap. In other words, a discrepancy between the investment capital they have secured through a business loan and the capital they actually need to fully realize their business vision.
The funding gap and the need for outside investment can arise for various reasons.
- Unexpected Costs – Every business venture has surprises. Unforeseen expenses like equipment repairs, regulatory compliance, or market shifts can create financial strains that the initial loan might not cover. Which sometimes means it’s better to stay a small and spicy business.
- Growth Opportunities – Sometimes, growth comes knocking at the door faster than anticipated. Expanding to new markets, launching new products, or scaling operations requires capital that may exceed the SBA loan amount.
- Working Capital Needs – Maintaining daily operations, managing cash flow, and making sales are integral to business success. An SBA loan may not always cover these ongoing working capital requirements.
- Strategic Investments – Building a successful business often requires strategic investments in marketing, technology, talent, or partnerships. These initiatives demand resources that might not be encompassed within the SBA loan.
By partnering with an investor who understands the unique opportunities and challenges of working with small businesses and government backed loans, entrepreneurs can secure the investment capital to take their business to the next level.
Step-by-step Guide to Pitch and Partner With Coinvestors
Approaching and partnering with investors requires thoughtful strategy and preparation. Here are some key tips to succeed in pitching investors:
1. Research the Investor
Understand the investor’s interests, listen to search-related podcasts, read their blogs, and research their past investments to find the right match.
2. Prepare a Compelling Pitch
Develop a concise, compelling pitch that highlights the unique value proposition, growth potential, and how the SBA loan and investor’s contribution will drive success.
3. Emphasize the Synergy
Clearly articulate the synergy between the SBA loan and equity investment, showing how they complement each other.
4. Build Relationships
Networking and building relationships with potential investors can open doors. Engage in industry events, seek introductions, and utilize platforms that cater to SBA loan collaborations.
Conferences can be a great place to do this. Here are the best:
5. Negotiate Transparently
Be open, honest, and transparent in negotiations, establishing clear terms and expectations that align with both parties’ interests.
6. Foster Ongoing Communication
After partnering, maintain regular communication, providing updates and involving the investor in strategic decisions as appropriate.
7. Demonstrate Agility
Show your ability to adapt to changing circumstances and align with the investor’s strategic insights, emphasizing the dynamic potential of the partnership.
Collaboration between investors and qualifying small businesses can lead to a thriving business relationship that leverages the best of both the SBA loan and equity investment worlds, driving innovation, growth, and long-term success.
10 Potential Risks of Adding an Additional Investor to Your SBA Loan
Here are some potential risks the entrepreneur should be aware of.
1. Dilution of Ownership
The most immediate concern for most small businesses is the dilution of ownership. When you bring in equity investors, you’re essentially selling a piece of your company. Over time, especially if you seek multiple rounds of funding, your ownership stake could be significantly diluted, which might alter your control over your business.
2. Differences in Vision
Equity investors, especially those with a significant stake, may have their own vision for the business’s future. Conflicts can arise if there’s a mismatch in long-term goals, business strategies, or operational processes.
3. Pressure for Returns
Equity investors are in it for the long game, but they also expect a return on their investment. This can lead to increased pressure to achieve profitability quickly, even if you envisioned a slower, more organic growth trajectory.
4. Potential Impact on SBA Loan Terms
Some SBA loans have covenants or terms that restrict the borrower’s actions, including taking on additional debt or equity. Bringing in an equity investor might violate those terms, potentially jeopardizing your SBA loan.
5. Decision-making Power
Investors, depending on the agreement, might want a seat on your board or at least some control. This could impact major business decisions, from hiring C-level executives to budget allocations.
6. Exit Strategy Complications
Equity investors will eventually want an exit, either through a company sale, an IPO, or another method. Their desired exit timeline and strategy might not align with yours, leading to potential conflicts.
7. Financial Transparency
With equity investors on board, there will be an expectation for regular, detailed financial reporting and transparency. For some business owners, this added scrutiny can feel invasive or burdensome.
8. Potential for Overvaluation
In the eagerness to bridge the funding gap, there’s a risk of overvaluing the company to attract investors. This can lead to problems in future funding rounds or during exits if growth expectations aren’t met.
9. Legal and Administrative Complexities
Equity agreements introduce a layer of legal and administrative complexity to business operations. From shareholder agreements to rights and privileges, navigating these can be tricky and time-consuming.
10. Emotional Stress
Lastly, think about the emotional toll. Managing relationships with equity investors, especially when disagreements arise, can be stressful. Balancing the needs of the business with investor expectations can strain even the most resilient entrepreneurs.
It’s essential for entrepreneurs to weigh these risks against the potential benefits of securing additional funding. While equity investment can provide the necessary capital to bridge the financial gap, it’s a decision that must be approached with a full understanding of the implications. Proper vetting of potential investors, clear communication, and carefully crafted agreements can mitigate many of these risks.
Your Turn
If you find yourself and your business in this niche SBA loan funding gap, you might need an outside investor for SBA loan investing. Now you have some suggestions of who to contact and how. Check out this article for more sources of possible investors.
But don’t think of it as a burden. Remember that combining SBA loans and equity investment can turn into new opportunities and powerful partnerships. The funding gap problem may just turn out to be a new way to fuel business growth, innovation, and long-term success.
The journey from securing an SBA loan to partnering with equity investors is filled with potential. With the right knowledge, preparation, and alignment, it’s a journey that can transform promising startups into thriving, impactful enterprises.
Updated: December 16, 2024
