The short answer: Most buyers raise the equity slice by forming a special purpose vehicle (SPV) that pools investor money to buy one business. Investors get equity, often preferred equity with a set return like 8%, through a private placement under Regulation D (usually Rule 506(b) or 506(c)), typically to accredited investors. It lets you control a bigger deal with less of your own cash, but you give up ownership and take on real securities-law and SBA obligations (the 20% guaranty rule).
Why raise instead of using your own cash
Two reasons. First, you may not have the full equity injection. Second, even if you do, spreading the risk across investors lets you keep reserves and pursue a larger, better business than your own savings would allow. The trade is ownership and answerability: investors expect a return and a say in the big decisions.
This is the standard path for searchers and how many first-time buyers get to a near-zero personal cash position.
Other people's money buys you a bigger business. It also buys you partners, price that in.
The SPV: how the raise is packaged
You typically form a special purpose vehicle, a single-deal entity that holds the investors' capital and owns the business (or the operating company's equity). It's clean: investors are exposed to one deal, liability is contained, and the cap table lives in one place. Investors buy membership interests or shares in the SPV; you, the operator, run the business and earn your share through a combination of common equity and a performance stake.
Preferred vs common equity
How you split returns between investors and yourself is the heart of the deal:
| Feature | Preferred equity (investors) | Common equity (operator) |
|---|---|---|
| Payment priority | Paid first | Paid after preferred |
| Return | Preferred return (e.g., 8%) + capital back | Upside above the preferred |
| Risk | Lower, downside protected first | Higher, last money out |
| Who holds it | Investors | You, the buyer/operator |
A common structure: investors get preferred equity with an 8% preferred return and their capital back first; then remaining profits split, often with the operator's share stepping up after investors hit a target return.
The rules: Regulation D and accredited investors
Selling equity is selling a security, which normally means SEC registration, expensive and slow. Regulation D is the exemption almost every acquisition raise uses. You file a Form D rather than register:
- Rule 506(b): raise from accredited investors plus a limited number of sophisticated non-accredited investors, no public advertising.
- Rule 506(c): you can advertise the raise, but every investor must be verified accredited.
An accredited investor generally has $1M+ net worth (excluding their primary home) or qualifying income. This is securities law, work with a securities attorney; getting it wrong is expensive.
Worked example: investors fund the injection
A $1,000,000 business, SBA loan for 90%, investors funding the entire $100,000 equity injection through the SPV:
| Source | Amount | % of price | Terms |
|---|---|---|---|
| SBA 7(a) bank loan | $900,000 | 90% | Senior debt |
| Investor preferred equity (SPV) | $100,000 | 10% | 8% pref + capital back first |
| Your cash | $0 | 0% | You earn common/carry for operating |
| Total | $1,000,000 | 100% | Watch SBA 20% guaranty threshold |
You put in $0 and own the operating upside, but investors get paid first and you're accountable to them. Model the loan side with the SBA loan calculator and confirm the price the cash flow supports with the max purchase price calculator.
The SBA 20% rule shapes the cap table
On an SBA 7(a) loan, anyone owning 20% or more must personally guarantee the loan, and citizenship rules apply. Passive investors rarely want to guarantee, so raises are often structured to keep each investor below 20%, or the deal uses conventional financing. Design the structure with your lender and attorney from day one.
Structuring the operator side?
A clean seller note and a lender-friendly cap table make a raise far easier to close.
Frequently asked questions
Most buyers form an SPV that pools investor capital to buy a single business. Investors receive equity, often preferred equity with a defined return, through a private placement under Regulation D, usually Rule 506(b) or 506(c) to accredited investors.
Preferred equity gets paid before common equity. Investors typically receive a preferred return (e.g., 8%) and their capital back before the operator earns a meaningful share. The rights are bespoke and set by the operating agreement.
Usually no. Most raises use a Regulation D exemption, filing a Form D instead of full registration. Rule 506(b) allows accredited and limited sophisticated investors without advertising; 506(c) allows advertising but requires all investors to be verified accredited.
Yes, but the SBA has ownership and guaranty rules, anyone owning 20%+ must personally guarantee, and citizenship rules apply. Investors often take preferred equity below the 20% threshold, or the deal uses conventional financing. See SBA ownership rules.
Sources
- SPVs, Regulation D (Rules 506(b)/506(c)), and accredited-investor standards, SEC Regulation D overview and Moschetti Law syndication guides (2025 to 2026).
- SBA 20% ownership/guaranty and citizenship rules, SOP 50 10 8; sba.gov 7(a) program.
