Changes to SBA 7(a) Program for Business Acquisitions

Changes to SBA Loans for Business Acquisitions Coming August 1, 2023

If your client is considering an SBA Loan to acquire or change ownership percentage of a business, they could be impacted by the recent changes announced by the Small Business Administration (SBA). A number of updates to their Standard Operating Procedures (SOP), will be made effective August 1, 2023. The following is an overview of the updates. Our Business Development Officers are well-versed in these changes and ready to discuss how they may impact your client’s SBA lending opportunities.

Read more about these upcoming changes based on the type of acquisition or ownership change you would be making:

• Complete change of ownership
• Complete partner buyout
• Partial change of ownership or any other change in ownership

SBA Loans financing a complete change of business ownership

At a minimum, SBA requires an equity injection of at least 10% of the total project costs. This means that in order to qualify, you’ll need to provide 10% of all costs required to complete the change of ownership, including working capital needs regardless of the source of funds.

Seller debt may not be considered part of the equity injection unless it is on full standby for the first 24 months of the SBA 7a loan or it is a debt that is on partial standby (only interest payments are being made). Partial standby debt will be considered equity if there is historical business cash flow available to make the payments and at least a quarter of the SBA-required equity injection is from a source other than the seller.

If the buyer owns a business that is in the same 6 digit NAICS code, will have identical ownership and located in the same geographic area as the entity being acquired, SBA considers this to be a business expansion and SBA will not require a minimum equity injection. However, depending on the strength of the buyer, the bank may require an equity injection.

SBA Loans financing a change of ownership between existing owners

If the 7(a) loan will finance more than 90% of the purchase price of a partner buyout, both of the following must be met:

1. The remaining owner(s) must certify that they have been actively participating in the business operation and held the same or an increasing ownership interest in the business for at least the past 24 months.
2. The business balance sheets for the most recent completed fiscal year and current quarter must reflect a debt-to-worth ratio of no greater than 9:1 prior to the change in ownership.

In the event the Lender is unable to document that both (i) and (ii) above are satisfied, the remaining owner(s) must contribute cash in the amount of at least 10% of the purchase price of the business, as reflected in the purchase and sale agreement.

SBA Loans that finance changes of ownership other than complete changes of ownership or complete partner buyouts

Loan proceeds may be used to fund the purchase of a portion of one or more owner’s interest in the business or of the business itself.  Both the business and the individual owner(s) who is acquiring the ownership interest must be co-borrowers on the new loan. All owners with 20% or more ownership will be required to provide an unlimited full guaranty. The percentages of ownership for this requirement will be based on the post-sale percentage of ownership in the business.

1. The business balance sheets for the most recent completed fiscal year and current quarter must reflect a debt-to-worth ratio of no greater than 9:1 prior to the change in ownership.
2. In the event the Lender is unable to document that (i) above is satisfied, the borrowers must contribute cash in the amount of at least 10% of the partial change of ownership purchase price, as reflected in the purchase and sale agreement.

If a short transitional period is needed to assist the business, the small business may contract with the seller as a consultant for a period not to exceed 12 months including any extensions. The seller may stay on as an owner, officer, director, stockholder or Key Employee of the business when one or more of the current owners is selling less than their entire percentage of their current ownership or the purchaser is an ESOP or equivalent trust or a cooperative and is acquiring a controlling interest (51% or more) in the employer business (including when the ESOP or equivalent trust or cooperative is acquiring 100% ownership of the small business).