Can an SBA loan fund a partial buyout of an owner?
Short answer
Yes. Proceeds can buy part of an owner's interest if at least one original owner stays and personally guarantees the loan. Anyone gaining new ownership must be a co-borrower, at any percentage. Source: 13 CFR § 120.202; SOP 50 10 8.1, App. 15, Para. A.1.c.ii.
Yes. 13 CFR § 120.202 allows 7(a) proceeds to buy a portion of an owner's interest. SOP 50 10 8.1, Appendix 15, Para. A.1.c.ii, calls this a Partial Change of Owner. It also covers buying treasury stock or membership units.
Core conditions
- At least one original owner remains an owner after the sale and personally guarantees the loan.
- The operating company and every new direct or indirect owner must be co-borrowers. Someone gaining 1% still signs.
- New indirect owners must also personally guarantee the loan.
- Remaining owners follow SBA's standard guaranty rules.
The seller can stay
The seller may remain as an owner, officer, director, stockholder, Key Employee or employee.
Credit terms
Coverage is 1.25:1 (Para. C.2.b). Equity is measured on the purchase price of the business, and the lender may reduce or waive it (Para. C.2.a). No Quality of Earnings report is required (Para. C.1.b).
These terms change if a new owner employed under 24 months takes 50% or more or becomes the largest shareholder (Para. A.1.c).
Collateral
Appendix 15 says standard 7(a) processing requirements apply to all changes of ownership. If the loan is not fully secured, the collateralProperty a lender can take and sell if a loan is not repaid. shortfall rules apply to all borrowers and co-borrowers.
Where it cannot be used
A 7(a) loan cannot fund a partial change of ownership in an Eligible Passive Company. It can fund one in the operating company (Para. A.4.a).
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