If it’s 5% equity it’s straight forward. They get 5% of the business and any owner’s draw they get 5%. I’m assuming this isn’t a very small business (under lets say 500k), because they wouldn’t be accounting for owner’s/managers salary. For that investment you should be netting around 300k (after reasonable owner/manager salary), growing every year, etc. I say net, because these types of service businesses usually sell for 2X EBITDA. Look at similar businesses for sale or even talk to a business broker (or a few) to get a better idea. Tell them you’re interested in selling your business and want a valuation. That usually includes owner/manager salary – this is the reasonable rate if you were to hire someone to manage the business.

It always depends on how the contract is written, but purchasing 5% equity is usually straight forward. Alternatively, he could want 5% of revenue, profits before any distributions, etc. A lot of possibilities for how the contract is written.

If he’s looking for for 5% there are a lot of other ways that aren’t as risky as investing in your business. There are a lot of angel groups he could join and invest in 1 or 2 of the startups (normally min is 20k). Those are more risky, but usually have a higher multiple return if they’re successful.