We’ve had many different clients utilize U.S. Small Business Administration (“SBA”) 7(a) loans to finance their purchase and/or sale of their business (or businesses). SBA loans, like the SBA 7(a) loan, are desirable because they can be more accessible and offer longer repayment terms and/or lower interest rates than many other conventional (or non-government-backed) loans.
Historically, the disadvantages to utilizing an SBA 7(a) loan to finance the sale and/or purchase of a business were the lengthy approval times required for the loans, the expansive amount of documentation and the rigid requirements of the SBA in terms of the structure of the financing for the transaction. In terms of rigid requirements, it would be remiss of me not to mention the requirement that a buyer acquire 100% of the ownership of the business and bring cash (or similar value) to the closing of the transaction equaling at least 10% of the value of the business (often referred to in these types of transactions as the “equity injection”).
Over the years, as SBA lending guidelines have developed and SBA preferred lenders have become more experienced and dynamic in structuring and closing SBA 7(a) loans, the obstacles to utilizing an SBA 7(a) loan to finance an acquisition or divestiture have been minimized.
Effective as of May 9, 2023, there are now even less obstacles for buyers/sellers desiring to utilize an SBA 7(a) loan, meaning buyers/sellers of businesses have huge newfound opportunities to use SBA 7(a) loans in ways they couldn’t before.
According to SBA Procedural Notice Control No. 5000-846607, which came into effect May 9, 2023:
- For a complete change of control transaction, the 10% equity injection requirement may now be satisfied with the amount of money subject to a promissory note issued by the buyer to the seller (i.e., an IOU given by buyer to seller) provided that the note is on full standby (i.e., no interest or principal payments are owed or made) in the first 24 months.
- For a partial change of control transaction (i.e., less than 100% of the control of the business is acquired), if the acquired business has a debt-to-worth ratio of no greater than 9:1, there will be no minimum equity injection requirement.
- When an existing business acquires another business in the same 6-digit NAICS code and in the same geographic area as the acquiring business, the SBA will now consider this transaction a business expansion and there will be no minimum equity injection requirement.
Bottom line, the new SBA guidelines are monumental as they have the effect of removing the equity injection requirement altogether or, in other cases, making the equity injection requirement easier to satisfy with seller financing, which eliminates an enormous obstacle we’ve seen in transactions where SBA 7(a) loan financing is sought.
If you are interested in entrepreneurship-through-acquisition or would like to expand your business or help someone else finance the purchase of your business, the time has never been better. Of course, buyers (and sellers) should always be careful not to overleverage a transaction. Additionally, just because the SBA underwriting guidelines permit a transaction structure that results in a partially government-backed loan doesn’t mean the lender will actually want to make the loan. For that reason, business owners (present and future) will be best served to consult their preferred SBA lender to stay apprised of the practical implications of these new SBA guidelines.
If you have any questions or want to discuss a business acquisition or divestiture, including any financing arrangement, please do not hesitate to reach out to me (brennan.block@brownwinick.com) or your BrownWinick attorney.
This blog is strictly for educational and informational purposes. Nothing contained in this blog is to be interpreted, construed and/or relied upon as legal, financial, tax, investment and/or other form of advice. Please consult your own legal, financial, tax, investment and/or other advisors.
Meet the author:
