An illustrative returns model for backing a business operator.
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How much are you investing?
Your capital contribution to the deal
Investment Amount$200,000
$50K$500K$1M
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How is the deal structured?
Different structures have very different return profiles
Pure Debt (Promissory Note)
You lend your capital to the business at a fixed interest rate (10% by default, and you can set your own). You receive interest each year and your principal back at the end. No equity and no upside, but you are paid before equity holders. Lowest risk, steadiest return.
Preferred Equity + Profit Split
You get a preferred return on your capital first (8% by default, and you can set your own), then remaining profit is split 80% to you and 20% to the operator (the operator's 20% is their carry). Standard for institutional-style deals.
Debt + Equity Hybrid
Half your capital is an interest-bearing loan to the business (10% by default, adjustable), half is equity. Lower upside, much lower downside.
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The business + your stake
These shape the size of the cash flow you'll share
Business SDE (annual)$200,000
Seller's Discretionary Earnings - cash flow before owner pay
$150K$400K$800K
Your Resulting Stake~33%
Computed from your capital and the business price (SDE x a market multiple). This is the share your investment actually buys, and it updates as you change the amount or the SDE.
Preferred Return8%
The preferred return you negotiate on your capital. 8% is the market-standard starting point; real deals run higher or lower.
5%12%
Hold Period7 years
How long before the business is sold (your exit)
3 yrs7 yrs12 yrs
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See your scenario
Get your full breakdown plus the BBC private deal feed
Illustrative Net IRR
18.4%
Base case, after operator comp + taxes
Total Cash to You
$614K
Distributions + exit
MOIC
3.1x
Multiple on capital
Steady Distribution
$3.4K/mo
After ramp + tax
Scenario Range
What changes if the business does better or worse than expected. Real businesses don't grow in a straight line.
Down 20% Year
9.2%
2.1x MOIC
Base Case
18.4%
3.1x MOIC
Up 20% Year
25.1%
4.2x MOIC
Year-by-Year Cash Flow
Base case, net of operator comp and 28% effective tax. Year 1 reflects acquisition + transition ramp.
Year
Distribution
Exit Proceeds
Cumulative
vs. Other Asset Classes
Long-run annualized returns. SMB equity is illiquid and concentrated, but the return premium reflects that.
This Deal (base)
0%
S&P 500 (avg)
10%
REIT (avg)
9%
Private Credit
8%
HYSA / T-Bills
4%
What we're assuming
Your effective stake:
Pure debt: You lend your capital at the interest rate you set (10% default), interest only, with principal returned at the end. Interest is taxed as ordinary income, and a note is senior to equity - so its return is steadier and largely insensitive to the business's performance.
Preferred return: The pref (8% default) and the loan rate are yours to set - they are negotiated in real deals, so the tool lets you model your own. The 80/20 split above the pref is the standard convention.
Equity stake is derived from your capital: Enterprise value = SDE x a size-based market multiple (3.0x under $500K SDE, 3.75x from $500K to $1M, higher above that). Your stake is what your capital buys at that price, so you can't over- or under-pay for an arbitrary share. Capped at 70%.
Operator compensation: The operator takes a market salary first (the greater of $85K or 20% of SDE). This isn't profit you share in.
Year 1 ramp: Most deals distribute little to nothing in year one (acquisition costs, working capital build, transition). We model year 1 at 25% of steady-state.
Tax drag: 28% effective on distributed K-1 income. Actual rate varies by state and bracket. You should run your scenario with your accountant.
Exit value: SDE grows 3% per year and the business sells at exit for the same size-based multiple it was bought at (no assumed multiple expansion). Capital gains and state tax drag exit proceeds by ~20%.
What this doesn't model: Operator failure, customer concentration loss, recession-cycle downturns lasting multiple years, or fraud. The down-20% scenario is a downside illustration, not a worst case - actual losses can be larger, up to total loss of capital.
Important disclaimer
This tool is a hypothetical, illustrative model for educational purposes only. It is not investment advice, not an offer or solicitation of any security, and not a promise or projection of actual returns. Real results depend on the specific deal, the operator, and market conditions - you can lose some or all of your capital. All figures are estimates based on the assumptions above. Consult your own financial, tax, and legal advisors before investing. HedgeStone does not guarantee any outcome.
See real deals structured this way
The Business Buyers Club is where Hedgestone's vetted deal flow lives. See actual pitch decks, financials, and partnership terms.