Equity Buy-ins
When a non-shareholder acquires less than 100% of the stock/equity through an equity sale.
Partial Equity Buy-in
Acquiring less than 100% of the equity/stock of the practice.
Partial Equity Tranches
Acquiring tranches of equity over a defined period.
Equity Buy-ins FAQ
-
When a non-shareholder acquires less than 100% of the stock/equity through an equity sale.
-
Partial Equity Buy-in Considerations
DEAL GUARD RAILS
There are few guard rails in deal structure for qualifying equity buy-in loans as long as they make sense to the (experienced) lender.SELLER CONSULTING
Ongoing seller involvement is a given in equity buy-ins.GUARANTORS
While a case-by-case basis the equity owners with 20% or more will execute grantor agreement with the lender. The borrower is a personal guarantor and 20% partners have a grantor agreement.COLLATERAL
No personal property collateral but there is a UCC lien on all current and future business assets of the entire entity.
DSC CASH FLOW
When a W2 advisor or internal manager (not owning a book or practice) are buying into a practice with an equity buy-in the cash flow is based on the net distributions received against the annual debt service.BANK ACCOUNT REQUIREMENT
While moving your bank operating account to the bank providing a business loan under $5 million isn’t typical in the advisory lending niche, it is even less common in a buy-in loan where the borrower may be only purchasing 5% or 10% of the equity. -
SBA Now Allows for Equity Buy-ins
New or existing shareholder purchasing a portion of equity from a partner.
Partial Equity Acquisitions
The SBA now recognizes and allows partial equity acquisitions. This flexibility means that interested buyers can acquire a share of an existing business without needing to purchase the entire organization.
Eligibility Requirements
For a buyer to qualify for an SBA loan financing a partial equity acquisition, they must acquire at least 20% ownership interest in the business. Simultaneously, the existing owner(s) need to retain a minimum of 20% ownership interest in the business.
Equity Injection Requirements
The equity injection requirement for partial equity acquisitions is waived if the new owner contributes at least 50% of the equity in the business.
Guaranty Requirements
All owners holding 20% or more of the business must provide a full, unlimited guarantee for any SBA loan financing the business's purchase. This requirement applies regardless of whether it is a complete or partial partner buyout.
-
Partial Equity Buy-in Considerations:
DEAL GUARD RAILS
Key guard rails are earn-out structures are ineligible. The inability to maintain seller as an employee post-sale isn’t relevant in equity buy-ins.SELLER CONSULTING
Ongoing seller involvement is a given in equity buy-ins.GUARANTORS
The borrower plus any 20%+ remaining partner is a personal guarantor and subject to any applicable personal property collateral requirements.COLLATERAL
A UCC lien on all current and future business assets is placed on the business. Personal property can be required for loans over $500,000 and when having 25% equity in the property.
DSC CASH FLOW
When a W2 advisor or internal manager (not owning a book or practice) are buying into a practice with an equity buy-in the cash flow is based on the net distributions received against the annual debt service.BANK ACCOUNT REQUIREMENT
This isn’t typically required or an issue anyway but especially in equity buy-ins. -
Complete Partner Buyout: Requires the lesser of a 10% cash injection of the purchase price (e.g., $50,000 for a $500,000 buyout) or an amount to achieve a debt-to-worth ratio of 9:1 or lower, unless the buyer has been an active operator with 10%+ ownership for 24 months (verified by buyer and seller) and the business maintains a 9:1 debt-to-worth ratio (total debt ÷ total equity, e.g., $900,000 ÷ $100,000 = 9:1). Seller financing on full standby (no payments for the 7(a) loan term) may count up to 50% of the injection.
Partial Partner Buyout: Requires the lesser of a 10% cash injection of the purchase price or an amount to achieve a 9:1 debt-to-worth ratio. Seller financing on full standby may count up to 50% of the injection. LoanBox verifies sources with account statements (e.g., savings, HELOC, gifts with gift letter).
-
What Remaining 20% Partners Need to Know About Equity Buy-in Loans
Different conventional lenders approach partial equity purchases or buy-ins differently. For partner buy-ins there is still the cash flow and LTV considerations that a partner buyout have but often the issue for partner buy-in loans is the lender’s guaranty and lien requirements.
A lien is placed on the entire business
The bank will place a lien on the entire business even though it is lending for an equity buy-in of only 1% of the business. So if only one is getting a loan, the lien is going to encompass the equity of the non-borrowing partner has as well.
It's a blanket UCC lien and covers all equity and client assets, now and in the future, and this stays in place the duration of the loan.
Owners with 20%+ direct/indirect ownership post-buyout must provide unlimited personal guaranties. For partial buyouts, selling partners retaining less than 20% ownership must guarantee the loan for 2 years post-disbursement. A 6-month lookback applies, requiring prior owners with 20%+ ownership within 6 months of application to guarantee unless they completely divest. For ESOP transactions, sellers retaining partial ownership must provide a full, unlimited guaranty regardless of percentage.
For conventional loans then a corporate guaranty or grantor agreement would be required. The grantor agreement (or equivalent) is where the non-borrower equity owners personally grant the business collateral to the lender.
Some conventional lenders based on the buyer and overall loan scenario may also require one or more personal guaranties from existing partners. Conventional lenders are very case-by-case basis on these types of deals but personal guaranties are not common.
Equity Injections FAQ
Equity injections are basically skin in the game from the lender's perspective for an acquisition, expansion, or partner buyout loan.
Most advisors who are acquiring other advisors books or practices qualify for the exception the SBA has for expansion loans. There is no equity injection requirement for expansion acquisition loans allowing for 100% bank financed acquisitions.
-
Equity Injection for SBA Loans
When financing a business acquisition through an SBA loan, such as purchasing an international trade company or a franchise, an equity injection demonstrates your commitment, or “skin in the game,” to the deal. Per the SBA SOP 50 10 8 (effective June 1, 2025), equity injection rules apply to change of ownership loans, with specific requirements for partner buyouts, business acquisitions, and exceptions for expansion loans.
What Is an Equity Injection?
An equity injection is the borrower’s or seller’s contribution of cash or assets to a change of ownership loan, showing dedication to the transaction. It’s not tied to purchasing equity but to injecting resources to fund the deal.
Purpose: Covers 10% of total project costs (all costs to complete the transaction, e.g., purchase price, fees, working capital), not the loan amount, unless exemptions apply.
Sources: Borrower cash (e.g., savings, HELOC, gift), seller standby notes, or a combination, sourced outside the business’s existing balance sheet.
Example: For a $1M acquisition (total project costs), a $100,000 equity injection is required, via $50,000 cash and a $50,000 seller standby note.
-
SBA Equity Injection Rules
SBA loans for change of ownership (e.g., acquiring a business, assets, or equity with 100% ownership transfer) require a minimum 10% equity injection of total project costs, per SOP 50 10 8 (effective June 1, 2025), unless exemptions apply. LoanBox ensures your loan package meets these standards for a seamless process.
Change of Ownership Loans:
Types: Include new business purchases, expansion acquisitions, and complete/partial partner buyouts.
Requirement: A 10% equity injection of total project costs (e.g., purchase price, fees, working capital), sourced from:
Cash: Paid by the borrower (e.g., savings, Home Equity Line of Credit, gifts with a gift letter), verified by recent account statements.
Seller Note: Seller financing on full standby (no principal or interest payments for the entire 7(a) loan term) can cover up to 50% of the injection (e.g., $50,000 for a $1M deal with a $100,000 injection).
Assets: Non-cash assets (e.g., equipment) may count if independently appraised above net book value.
Seller Note Restrictions: Must be subordinated to the SBA loan, with no acceleration clauses. Partial standby notes with interest-only payments are not permitted.
Example: A $1.5M business purchase (total project costs) requires a $150,000 injection, met with $75,000 cash and a $75,000 seller standby note on full standby for the loan term.
-
Injections for Partner Buyouts
Partner buyouts (complete or partial) have unique equity injection rules, reflecting their operational impact.
Complete/Partial Equity Buyouts:
Requirement: The lesser of a 10% equity injection of the purchase price (e.g., $50,000 for a $500,000 buyout) or an amount to achieve a debt-to-worth ratio of 9:1 or lower on the pro forma balance sheet (based on the most recent fiscal year and quarter), unless exempted.
Exemption: No injection is required for complete or partial buyouts if:
The borrower has been an active operator and owned 10% or more of the business for at least 24 months, verified by both buyer and seller.
The business maintains a debt-to-worth ratio of 9:1 or lower (total debt ÷ total equity, e.g., $900,000 ÷ $100,000 = 9:1).
Sources: Cash (e.g., savings, Home Equity Line of Credit, gifts with a gift letter), seller financing on full standby (up to 50% of the injection, no payments for the entire 7(a) loan term), or independently appraised non-cash assets (e.g., equipment above net book value). LoanBox verifies sources with documentation like account statements.
Restriction: Seller notes must be on full standby and subordinated to the SBA loan, with no acceleration clauses. Partial standby notes with interest-only payments are not permitted.
Guaranties: Post-buyout, owners with 20%+ direct/indirect equity (including the seller in partial buyouts) must provide unlimited personal guaranties. Sellers retaining less than 20% equity must guarantee the loan for 2 years post-disbursement. For ESOP transactions, sellers retaining partial ownership must provide a full, unlimited guaranty regardless of percentage.
Example: A partial buyout of $500,000 requires a $50,000 injection (e.g., $25,000 cash + $25,000 seller standby note) unless the borrower has 24 months of 10%+ ownership and a 5:1 debt-to-worth ratio ($500,000 debt ÷ $100,000 equity), waiving the injection. The seller, retaining 10% equity, guarantees the loan for 2 years.
Calculating the 9:1 Debt-to-Worth Ratio:
Formula: Ratio = Total Debt / Total Equity (e.g., $500,000 debt ÷ $100,000 equity = 5:1).
Interpretation: A ratio ≤ 9:1 indicates financial stability, potentially waiving the injection. Above 9:1 (e.g., $1.2M debt ÷ $100,000 equity = 12:1) requires the injection to reduce risk.
Example: A business with $750,000 debt and $150,000 equity (5:1) avoids a $100,000 injection for a $1M complete buyout, assuming the borrower has 24 months of 10%+ ownership.
-
Injections for Business Acquisitions
Business acquisitions (new or expansion purchases) follow standard SBA equity injection rules.
Equity Injection Sources:
Cash Payment: Paid by the borrower, typically wired to the lender or escrow account 1–2 weeks before closing, from savings, investments, Home Equity Line of Credit (HELOC), or gifts (with a gift letter confirming no repayment obligation). Lenders verify with recent account statements.
Full Standby Note: Seller financing covers up to 50% of the 10% injection (e.g., $100,000 for a $2M acquisition with a $200,000 injection), with no principal or interest payments for the entire 7(a) loan term, subordinated to the SBA loan with no acceleration clauses.
Assets: Non-cash assets (e.g., equipment) may count if independently appraised above net book value.
Restriction: Partial standby notes with interest-only payments are not permitted. Seller notes exceeding 50% of the injection are ineligible.
Example: A $2M acquisition (total project costs) requires a $200,000 injection, met with $100,000 cash and a $100,000 seller standby note on full standby for the loan term.
-
Exception for Expansion Loans
Expansion loans through acquisition may be exempt from equity injection, easing financing for growth.
Expansion Acquisition Exemption:
No Injection Required if:
Target business is in the same 6-digit NAICS code as the existing business.
Located in the same geographic area (e.g., same metropolitan region).
Has identical ownership structure (same owners, percentages).
Otherwise: Standard 10% equity injection applies.
Example: An advisor who is 100% owner of a single member LCC acquires another advisor’s book or practice with the same ownership.
-
Equity Injection Sources and Verification:
Acceptable Sources:
Savings: Personal or business savings (outside the acquired business’s balance sheet), verified by bank statements.
Liquidated Investments: Proceeds from sold stocks, bonds, or other assets, documented by investment account records.
Gifts: Funds from a third party (e.g., family), requiring a gift letter confirming no repayment obligation.
HELOC: Funds from a Home Equity Line of Credit, verified by loan statements.
Unacceptable Sources: Funds from the acquired business’s existing balance sheet or borrowed funds (except HELOC or seller standby notes). Franchise fees do not count as the equity injection, even for startups; they’re included in total project costs (e.g., fees, equipment, working capital), but the 10% injection must be separate.
Project Costs Context:
The equity injection covers 10% of total project costs (purchase price, fees, working capital, etc.), not just a “down payment” toward the purchase price (Paragraph D.2.a).
Verification: Lenders require recent account statements (e.g., bank, investment, HELOC) to confirm the source’s legitimacy and availability. If funds come from multiple sources, each must be documented (e.g., separate statements for savings and HELOC). No fixed timeframe (e.g., two months) is mandated by SBA, but lenders typically request statements covering recent activity.
Process of Providing the Equity Injection:
Payment Method: Funds are typically wired to the lender or an escrow account 1–2 weeks before loan closing, ensuring availability for the transaction.
Documentation: Lenders require account statements, gift letters (for gifts, verifying no repayment), or HELOC records to confirm funds. Multiple sources require documentation for each (e.g., savings and investment statements).
Example: For a $1M acquisition requiring a $100,000 injection, you wire $60,000 from savings and $40,000 from a HELOC, providing statements for both accounts to verify the funds.
-
What is the SBA equity injection seller standby note?
If your buyer is utilizing an SBA loan to finance the purchase of your book or practice then the buyer’s down payment requirement depends on if it’s considered an expansion acquisition. In most all cases when an established independent advisor or firm is acquiring your business with an SBA loan they will not be required to make a down payment and you will not be required by the lender to seller finance a portion of the sale.
However for book and practice acquisitions where the buyer is currently 100% W2 or has issues for whatever reasons with coming up with the full 10% cash for the required equity injection, there is an option for you as the seller to step in and help in a big way, all with minimal exposure to you. Seller notes allow the seller to finance part of the equity injection, reducing the buyer’s upfront cash need.
Full Standby Note: Can cover up to 50% of the 10% injection (e.g., $50,000 for a $1 million project, with the remaining $50,000 from buyer/borrower sources like cash).
Terms: No principal or interest payments for the entire term of the 7(a) loan, which is a ten-year term. The note must be subordinated to the SBA loan with no acceleration clauses.
Here’s how it works:
An SBA acquisition loan allows for attrition offsets, hold-backs and clawbacks, and any additional seller financing are eligible elements in an acquisition payment structure. This example doesn’t account for additional deal components.
Upfront Cash: You could receive 95% of the purchase price (up to the SBA-approved valuation) in cash at closing, funded by the SBA loan and the buyer’s cash contribution.
Standby Note: The remaining 5% is a 10-year standby note from you to the buyer, with no principal or interest payments during the SBA loan term (typically 10 years). At maturity, the buyer pays the principal plus accrued interest (e.g., 6-9%, negotiable) in a lump sum.
Subordinated Lien: You hold a subordinated lien on the practice’s assets, behind the lender’s first lien, securing your claim if the buyer defaults (though secondary to the lender) or sells.
Example: You sell your practice for $1 million (SBA-approved valuation). The buyer needs a $100,000 equity injection (10% of project costs, including price, fees, and working capital). You provide a $50,000 standby note at 9% simple interest. At closing, you receive $950,000 in cash. In 10 years, you collect $95,000 ($50,000 principal + $45,000 interest).
-
Equity Injection With Conventional Loans
An equity injection demonstrates your commitment, or “skin in the game,” to the deal. This contribution reduces lender risk which is paramount for the loans not partially guaranteed by the SBA.
While a borrower’s personal financial situation and credit profile have significant influence, the primary equity injection criteria from conventional lenders is the Loan-to-Value (LTV) ratio. Typically, conventional lenders cap LTV at 75%, although some may extend to 85%.
For acquisitions, LTV is calculated by combining the value of the buyer's and seller's practices, resulting in most conventional acquisition deals meeting the LTV requirement. If a $1M value practice acquires a $1M value practice then $1M loan/$2M value = 50% LTV.
When a $333,000 value practice acquires $1M value practice then $1M/$1,333,000 = 75% LTV. In this case an equity injection (down payment and/or seller financing) is not required based on LTV but the lender may have other reasons they may want to see "some level" of injection (5%-10%).