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PACT

Common sense deal docs for buying SMBs with investors

PACT (Partnership Acquisition Commonsense Terms) is a free, balanced starting point for SBA acquisitions with outside investors. Use the Operating Agreement, Investor Suitability Questionnaire and Subscription Agreement as a baseline you can tailor to your deal.

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Why PACT Exists

Buying a business is hard enough. Negotiating documents from scratch makes it harder, slower, and more expensive for everyone. PACT gives searchers and investors a shared starting point that is:

  • Fair to both sides
  • Designed for SBA-backed acquisitions
  • Vetted by experienced M&A counsel
  • Written in plain English with explanations behind the terms
  • Can be customized by your law firm to fit their needs

Who Created PACT

Shareholder Ventures Logo

Capital, community & back-office support for entrepreneurs buying profitable SMBs.

Tim Ericson
COO @ Shareholder Ventures

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Lead counsel on the PACT documents. Joe has closed dozens of lower-middle-market deals, regularly works with investors, and knows SBA quirks inside out.

Joseph Spina
Partner @ Cullen & Dykman LLP

The PACT Documents

Operating Agreement

An operating agreement is the master playbook for your company. It sets who owns what, who runs the business day to day, how big decisions get approved, and what information investors receive. It protects investor rights without slowing you down by making clear when you can act on its own and when investor consent is required.

PACT gives you a fair starting point that you can customize for your deal. The templates cover the core topics operators and investors care about, including ownership and management, major decision rights, investor protections, and how distributions work. You can tailor the language with your counsel so it fits the facts of your acquisition while keeping a balanced, common sense foundation.

Subscription Agreement

A subscription agreement is the “sign here” document where an investor commits to buy equity (called membership units in an LLC) in the company you are acquiring. It states how much they’re investing and what they receive, confirms investor status and basic representations, acknowledges risks and transfer limits, collects information needed for tax and compliance, and explains how and when funds are delivered at closing. It works hand in hand with the Operating Agreement: the Operating Agreement sets the rules of the company, and the subscription agreement is the investor’s ticket in, agreeing to be bound by those rules.

Investor Suitability Questionnaire

An investor suitability questionnaire is a short form you give to prospective investors to confirm they qualify as accredited investors under SEC rules. Private offerings of equity rely on this so you only accept investors who meet the income, net worth, or professional criteria and so you can document compliance with the Securities Act. 

PACT Key Terms Explanation

Preferred equity structure

Plain English

Investors put in cash as Preferred Equity. Their money comes out first, with a stated preferred return, before common equity gets anything. It isn’t a loan and there’s no fixed schedule. Profit distributions follow this order: first the accrued preferred return, then the return of originally invested capital. Only after both are satisfied do common-equity splits take over.

How PACT sets it

Liquidation preference: investors get back original investment plus any accrued preferred return before common participates. 

Preferred return: accrues and compounds monthly at the agreed annual rate. 

Prepayment: the company can pay down accrued return and principal at any time, without penalty.    

Why it exists

It protects investor downside, sets a clear order of payouts, and encourages the operator to prioritize paying down the preferred (over the loan) so compounding stops. 

Quick example

If an investor puts in $500,000 at 12%, the preferred return accrues. Payments first cover the accrued return, then pay back the $500,000. After both are paid, distributions switch to common-equity splits.

Conversion to common and the step-up

Plain English

After the preferred return and the return of capital are fully paid, the Preferred automatically converts into common equity at the agreed Step-Up multiple. This is how investors keep long-term alignment after they have been paid back and the operator starts making more than just their salary.    

Quick example

Investor ownership % = (Investor equity ÷ Purchase price) × Step-Up.

Example: $500k on a $4.0M purchase is 12.5%. With a 2.0× Step-Up, investor ownership converts to 25%.

Operator cash goes in alongside investors

With PACT, the operator contributes personal cash and that amount rides with the preferred for economics only and does not receive special control rights. This keeps incentives aligned without blurring governance and is operator friendly.

Common sense governance

Plain English

PACT does not require a formal board for small companies. Instead, the Operating Agreement lists ‘Major Decisions’ that need lead investor consent while investors still hold equity. Day-to-day operations remain with the operator. PACT focuses on preventing bad-actor scenarios while keeping most day-to-day decisions with the operator.


Major Decisions, in plain terms

  • Buying another company or investing in outside businesses
  • Entering new real estate leases outside the approved budget
  • Affiliate deals, which must be arm’s-length and approved
  • Going over the approved budget beyond a set dollar threshold
  • Taking on additional debt above a set cap
  • Hiring, firing, or changing pay for the CEO and key executives beyond the budget
  • Making distributions before preferred is repaid, other than permitted tax or required lender payments
  • Amending governing documents in ways that hurt preferred or issuing new equity
  • Selling or merging the company

The thresholds for budget deviations and additional debt are set based on the specifics of the deal; the Operating Agreement uses fill-in fields.    

Put option

Plain English

Only after all SBA term debt is fully repaid (typically 10 years) investors may ask the company to repurchase some or all of their units at fair market value. A qualified independent appraiser determines the value. If either side disagrees, they can commission a second appraisal at their own expense. If the two appraisals differ materially, a tie-breaker process sets the final value. If the company cannot pay the full amount up front, the balance can be paid over time under a short promissory note at a market rate. The idea is that once debt service ends, cash flow is available to fund these payments.


Why it exists

It creates a practical exit path in the long run without forcing a sale of the business and without conflicting with SBA rules while the SBA loan is outstanding. 

Operator compensation

Plain English

The operator’s base salary is set in the deal, reviewed annually, and typically increases with inflation up to a cap. Changes other than inflation require approval from the investors. This guards against outlier pay and encourages alignment between the operator and investors where the operator increases their take-home pay through distributions (that are shared with investors) once the business is producing cash.    

Order of how the operator gets paid

1. Salary approved by investors.

2. Return of any personal cash invested as part of the preferred, alongside other preferred holders

3. Long-term shared upside through common equity    

Key person life insurance

Plain English

While preferred is outstanding, the company keeps a key person policy on the operator sized to pay off preferred obligations if the worst happens. This can be combined with the SBA-required policy or a separate policy. Since the preferred is typically paid back before the 10 year SBA term is up, a separate policy makes it easy to cancel coverage once the preferred is paid back. If the operator dies or becomes permanently disabled, investors can install replacement leadership so the business keeps running. The operator’s heirs retain the economic rights.  This ensures that investors do not lose capital in the event of a death and can stabilize the company for the benefit of the investors and the operator's heirs.

Passthrough LLC annual tax distributions

Plain English

If your LLC is taxed as a partnership, profits pass through to members. You can owe taxes on your share even if the company has not sent you cash. To avoid out-of-pocket taxes, the Operating Agreement allows tax distributions so members can cover the bill.

How PACT sets it

  • Each year the company will distribute cash to each member using a single assumed tax rate applied to that member’s allocated taxable income.

  • Estimated payments can be made during the year and trued up after K-1s are finalized.

  • If cash is tight or distributions would breach covenants, payment can be deferred until permitted by the agreement and lender.

Where tax distributions sit in the waterfall

  • Tax distributions are permitted even while Preferred is outstanding.

  • They do not reduce or satisfy Preferred obligations. They are not payments of preferred return and do not lower accrued preferred return or return of capital.

 

Contributors and Supporters

Contributing Law Firms

The firms below provided comments on the PACT Operating Agreement and Subscription Agreement. Their involvement is limited to feedback, not recommendation or legal advice.

Founding Investor Supporters

The firms listed here have adopted PACT as their starting template and helped shape it with comments and real-world feedback.

Community Supporters

Accelerators and industry groups supporting adoption of PACT by sharing the docs and channeling feedback for future updates.

Are you a law firm, community partner, or investor?

Review the PACT Operating Agreement and Subscription Agreement, then share comments that will inform upcoming releases.

Download PACT

Unlock a comprehensive set of open-source legal documents specifically designed for business acquisitions funded by SBA loans and outside investors. Download the PACT Operating Agreement, Investor Suitability Questionnaire and Subscription Agreement curated for entrepreneurs, investors, and advisors navigating small business acquisitions. All documents are free to use, adapt, and share, streamlining your acquisition process.

⚠️ IMPORTANT ⚠️

PACT materials are provided for educational purposes only as a neutral baseline for SBA-backed acquisitions with outside investors. They are not a substitute for legal advice. Every transaction is different and lender requirements and laws vary. Searchers must retain experienced SMB M&A counsel to review, customize, and approve the Operating Agreement, Subscription Agreement, and any related documents to protect their interests. Downloading or using PACT does not create an attorney-client relationship with the creators or any other contributor. Participation by law firms reflects feedback only and is not an endorsement. You and your counsel are responsible for all final terms.