Why buying a business can result in three separate transactions

Mainshares engages with business buyers early on in their search process—and one common misconception among searchers is the breadth and extent of the moving pieces involved once a buyer goes under contract on a business. 

While at the outset, acquiring a company appears to be a single transaction, some business buyers—the ones who we see at Mainshares—actually need to navigate through three complex and interconnected deals simultaneously. For an issuer to successfully secure the financing and close on their acquisition, they must raise capital, secure debt, and handle the acquisition all at the same time.

These processes—each demanding extensive documentation, strict timelines, and a deep understanding of financial and legal procedures—must come together seamlessly for the transaction to close successfully. It’s a delicate balance, especially for first-time search entrepreneurs unfamiliar with the nuances of each stage. 

At Mainshares, we’ve identified existing challenges associated with these processes, and we’re working diligently to build solutions. Here, we’ll walk through the core challenges issuers face and how our platform aims to bridge the gaps.

The three transactions required to close a deal

Lining up financing and closing on an acquisition requires managing three interconnected transactions: raising capital, securing a loan, and completing the acquisition. 

Before we break down these transactions, let’s first take a look at why these transactions occur.  

Business buyers must bring together sources of capital to fund their acquisition. This is referred to as their “capital stack,” which often includes a meaningful portion of SBA debt, along with a potential seller note or equity roll, investor equity capital, and their own contribution. 

Two aspects of this capital stack—SBA debt and investor equity capital—can result in lengthy, complex transactions before an issuer can close the deal with the business seller.

Let’s break down what each transaction entails and the specific hurdles at each step.

1. Securing debt capital (SBA or private source)

Many small and mid-sized businesses rely on loans to finance the bulk of their acquisitions, often opting for SBA loans due to favorable terms. However, securing a loan adds complexity to the issuer’s workload:

1. Choosing a Lender: The issuer evaluates terms, rates, and requirements among various lenders. Once a lender is selected, the issuer submits financial documents and business plans to the lender for review.

2. Term Sheet and Underwriting: Upon initial review, the lender issues a term sheet outlining proposed terms. The issuer agrees to these terms, initiating the underwriting process, which further scrutinizes their financials and ability to repay.

3. Commitment Letter and Closing: Once approved, the lender issues a commitment letter detailing the loan’s terms. The final loan agreement and personal guarantees are signed at closing, provided the issuer meets all conditions, including proof of down payment funds.

The loan closing process is detailed, requiring extensive documentation along with a personal guarantee, which is a legal agreement that makes the borrower personally responsible for the loan if the business can’t repay it. The issuer must also manage conditions like insurance requirements and collateral, all while coordinating with investors to ensure loan funds can be released upon acquisition. 

This is a significant lift, particularly if the issuer lacks experience in loan management. Our team has seen hundreds of loan underwriting experiences across issuers. We can provide context based on previous transactions, helping you navigate each step with clarity and confidence.  

2. Raising capital from investors

Since SBA debt typically covers 60-90% of the business’s purchase price, buyers will need to come up with the rest of the necessary capital, which is where they typically turn to investor equity. This process is critical for covering upfront costs, such as down payments, and involves the following steps:

1. Setting governance structure and modeling financial returns: Some of the issuers' initial responsibilities before a capital raise include setting the governance structure and creating financial projections. Issuers will need to work with an attorney and often a CPA to complete these tasks.

2. Finalizing investment documentation: Before securing commitments, the issuer must finalize investment documents, such as a Subscription Agreement (for LLCs) or a Preferred Stock Purchase Agreement (for corporations), as well as operating agreements or certificates of incorporation. This documentation provides the legal foundation for the investment and must be reviewed, executed, and stored properly.

3. Collecting investor commitments: Investors review the transaction documents and sign a commitment letter. Issuers coordinate investor signatures through a third-party e-signature provider, like Docusign. Once commitment letters are signed, issuers must collect investor funds either through an escrow provider or using their own entity’s bank account.

Issuers, especially those new to capital raising, may lack familiarity with finalizing the investment documentation and collecting investor's funds. Errors and oversight in this process present a risk of legal trouble and the mismanagement of funds.

3. Closing on the acquisition

Finally, with funds in place, the issuer is ready to acquire the business itself—a transaction that has required careful negotiation, diligence, and now, execution. This process includes tasks, such as:

1. Letter of Intent (LOI): Following initial diligence, the issuer submits an LOI, outlining the deal’s high-level terms. Once accepted, full due diligence begins – this process can go on for weeks or even months and involve various parties to help fully diligence the target company from a business and legal perspective.

2. Purchase Agreement Drafting and Negotiation: The issuer’s legal team drafts the purchase agreement, which details key elements like closing conditions, indemnifications, and liability. The seller will then review and revise the documents as part of the negotiation process. 

3. Finalizing the Acquisition: With the purchase agreement completed and closing conditions met, the issuer can proceed to closing. This involves executing documents, releasing funds, and officially acquiring the target company.

Given the concurrent demands of closing on raised capital and loans, timing is crucial. If any piece falls out of place, the transaction could be delayed. With three distinct sets of stakeholders, each with its own timelines, the issuer must coordinate carefully to ensure all conditions align for a successful close.

How Mainshares supports seamless transactions

Today, Mainshares’ dedicated onboarding team partners closely with each and every issuer on the platform to help guide the process from start to finish. Issuers receive several benefits of working with Mainshares, including:

1. Template and standardized documents: Mainshares provides issuers on the platform with standardized transaction documents—including an Operating Agreement, Term Sheet, Subscription Agreement, and Commitment Letter—which they can use and adjust with help from their legal counsel. In our experience, we’ve seen that when issuers use a common set of transaction documents, the drafting and negotiation process is cut down (saving on legal fees), and the issuer has an easier time explaining to investors the details of the deal. 

2. Our partner network: Our partner network consists of attorneys, CPAs, QoE professionals, and others who can help guide you through the process of buying a business. We’ve built the network, so you don’t have to. 

3. Closings support: Our closings team ensures that everything is in order as you go into closings – including, but not limited to – investor communication, closing documents, collecting and confirming funds, and timely managing of all moving pieces. Investor capital network: Mainshares has hundreds of SMB investors on the platform, and issuers can use our investor directory to reach out to prospective investors who may contribute either financially or strategically to the company. 

Our plans for the future:

At the same time, our product team has plans for future tools that would continue to help streamline the issuer’s experience across all three complex transactions, enhancing the platform’s utility between the initial issuer onboarding and execution.

1. Integrated Document Execution: Offering a streamlined document execution process, including options for e-signatures and holding signature pages in escrow. This would allow signatures to be stored until closing, helping issuers avoid issues with dates or missing pages.

2. On-Platform Fund Collection: Enabling direct fund transfers through the platform would provide greater transparency for all parties, streamline capital calls, and simplify fund management. Issuers would benefit from a clear dashboard that tracks funds received, reducing their administrative burden.

3. Automated Closing Checklists: Incorporating a checklist that guides issuers through each closing step, from document execution to fund collection, could improve accuracy and ensure all conditions are met. For first-time entrepreneurs, this feature would offer invaluable support in navigating a complex process.

4. Investor Dashboard Updates: Addressing the engagement gap on the investor side is equally important. Regular updates in the investor dashboard, reflecting their current commitments and next steps, would enhance the experience and build confidence. Features like automated notifications for funds received or updates on acquisition progress would reassure investors of their role in the ongoing transaction.

Our commitment to you

Ultimately, our goal is to transform Mainshares from a platform for initial introductions into a comprehensive acquisition partner, supporting both issuers and investors through every stage of their journey.

Acquiring a business is a complex process, but with the right tools, it doesn’t have to be overwhelming. We’re committed to equipping our users with resources and features that not only facilitate transactions but also empower them to make informed decisions as they build their businesses. By investing in these improvements, we’re ensuring that Mainshares continues to serve as a reliable partner for every entrepreneur navigating the path to ownership. 

Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.