What are standard investor terms for a self-funded search?

What are the standard terms?

Self-funded searchers typically buy a $1 million–$10 million business with 75–90% SBA debt. Investors fill part of the equity. The terms below are what investors commonly receive in return.

• Step-up: commonly 2x, down from about 3x. A step-up credits capital that takes risk before closing at more than its face value when it converts into the deal. Term sheets define which dollars qualify.
• Preferred return: 8–12% a year. Investors earn this on their capital before the common equity shares in profits. Check whether it compounds and whether it is paid in cash or accrues.
• Liquidation preference: 1.0x. On a sale, investors get their capital back before common holders receive anything.
• Searcher ownership: roughly 60–80% of the equity. This is the main difference from a traditional search fund, where the searcher typically earns about 20–30%.
• Searcher salary: commonly $100,000–$150,000. Investors expect a market salary, not a share of profits disguised as pay.
• Investor return target: 30–40% IRR. Investors price the deal to reach that range if the plan works.

How do SBA rules change the terms?

The SBA loan sits ahead of the investors, and SOP 50 10 8.1 limits what investors can receive while it is outstanding. As of October 2026:

• Half cap on limited sources. Passive minority investors holding under 20% in aggregate with no control are a "limited source". Together with full-standby seller notes and other standby debt, they can supply no more than half of the required 10% injection.
• Tax distributions only. If minority-investor equity counts toward the injection, those investors generally get only tax distributions until the SBA loan is repaid. On a 10-year loan, the preferred return accrues for a long time.
• Personal guarantees. Every owner of 20% or more must guarantee the loan. Check each investor's stake against that line.
• Coverage. The business must show 1.25x debt service coverage on historical cash flow for an Initial Acquisition. Every dollar distributed to investors is a dollar not available to cover that debt.

Put the SBA restrictions into the operating agreement. Investors who expected quarterly cash and receive only tax distributions become unhappy investors. Confirm the exact treatment with your lender and your lawyer.

What should a searcher negotiate?

The headline numbers are usually close to market. The details decide how much you keep.

• Simple or compounding preferred return. Compounding over a long accrual period costs the searcher far more.
• Participating or non-participating preferred. Participating preferred takes its preference and then shares in the common. Non-participating takes the greater of the two.
• Salary and bonus. Set them in writing, with a process for raises.
• Consent rights. Decide which decisions need investor approval: new debt, a sale, new acquisitions.
• Future acquisitions. Decide now whether investors get a right to fund the next deal, and at what terms.

What changes if the company later joins a holding company that lists?

Most self-funded term sheets assume one company and a sale. A holding company assumes many companies and no sale. If you may list a holding company later, three things change.

• The cap table must convert. Preferred returns, step-ups and liquidation preferences at the operating company usually have to be converted to common, exchanged for parent shares or bought out before a listing. Write a conversion mechanism into the original terms. Confirm the structure with securities counsel.
• Investors' liquidity changes. Public shares can be sold. Restricted shares in a reporting company generally can be resold after a six-month holding period, subject to conditions.
• The company has to qualify. OTCQB, for example, requires PCAOB-audited annual financials, at least 50 beneficial holders with 100 or more shares each and at least 10% public float. Clean books from day one make that possible. The routes are covered in the PublicFinancial ETA public holding company playbook.

Worked example: investor terms on an illustrative deal

The price, equity split and exit value are assumptions. The rates sit inside the ranges above. The example assumes participating preferred and a simple, accruing preferred return.

1. Purchase price $3,000,000. Total project costs $3,200,000. Minimum injection at 10%: $320,000.
2. Equity: the searcher puts in $160,000 and investors put in $320,000. Investors receive 30% of the common, spread across several investors who each hold under 20%; the searcher holds 70%.
3. Preferred return at 10% simple, accruing: $32,000 a year. After five years: $160,000 accrued.
4. Sale in year five. Equity value after repaying debt: $3,500,000 (assumed).
5. Liquidation preference: investors receive $320,000.
6. Accrued preferred return: investors receive $160,000.
7. Remaining $3,020,000 split 30/70: investors $906,000, searcher $2,114,000.
8. Investors' total: $1,386,000 on $320,000, or about 4.3x in five years. That is roughly a 34% IRR, inside the 30–40% target.

With non-participating preferred, investors would take the greater of their preference or their common share, and the searcher would keep more. That difference is covered in the waterfall article linked below.

Where these numbers come from: Investor terms, searcher equity, salary, deal size and debt levels come from Smash and Searchfunder; traditional searcher equity from Long Angle. SBA rules come from SOP 50 10 8.1 as summarized by Beancount and Cantrell Firm. Listing requirements come from the OTCQB Rules. The resale rule is general securities law under Rule 144; confirm with securities counsel. SOP 50 10 8.1 applies to loans numbered on or after October 1, 2026; lender practice under it is still settling and these are secondary summaries, so confirm current terms with your SBA lender.

Related questions

Do self-funded search investors get board seats?

It depends on the size of their stake and the term sheet. Investors without board seats usually ask for information rights and consent over major decisions. Passive minority investors who count toward the SBA injection must have no control.

Can I pay investors a dividend while the SBA loan is outstanding?

If their equity counted toward the injection, generally only tax distributions until the loan is repaid. Other distributions depend on your loan terms and coverage. Ask your lender before promising investors any cash yield.

Are these terms the same for a second acquisition?

Not necessarily. A second deal by an operating company with a track record may get better terms. If you plan several deals, consider raising at a parent company instead of deal by deal.

What comes next

The least intuitive of these terms is the step-up, explained with numbers in How does an equity step-up work in a search deal? The buyers who end up with the most valuable companies decide what the business goes into before they buy it.

Related articles

• How does an equity step-up work in a search deal?
• How does the waterfall and preferred return work in a self-funded deal?
• How much salary can I pay myself after buying a business with investors?
• What are typical independent sponsor fees and carry?
• How do you build a holding company for acquisitions?

Meraki Dealmakers is a service of Meraki Partners, LLC, an advisory firm. It is not a broker-dealer, investment adviser, business broker, law firm or accounting firm. This article is general information, not legal, tax or investment advice.