SBA Digest: Change is a Good Thing – Breaking Down Business Acquisitions

The Small Business Administration ("SBA") permits business owners to utilize loan proceeds for a change of ownership. When considering an SBA guaranteed loan to finance a change of ownership, the acquisition can be accomplished through either a stock purchase (including stock redemption) or an asset purchase. An asset purchase is considered a change of ownership if the loan applicant is purchasing all or substantially all of the assets of the seller's business. Lenders must remain attentive to the Standard Operating Procedures ("SOP") when originating a loan in order to confirm that the change of ownership is eligible and complies with SBA guidelines. The following types of ownership changes are permitted:

Change of Ownership Between Existing Owners

  1. The existing business owner(s) is purchasing the ownership interest of another owner(s), resulting in 100% ownership of the business by the purchasing owner(s); or
  2. The small business is redeeming the ownership of an owner(s), resulting in 100% ownership of the same small business by the remaining owner(s).

    Change of Ownership Resulting in a New Owner

  3. A small business is purchasing 100% of the ownership from an existing business;
  4. An individual who does not own any of the selling small business purchases 100% of the same business; or
  5. A small business is acquiring another small business through a standard asset purchase.

There are several additional key requirements lenders must consider after confirming that a change of ownership structure is permitted. If an individual is selling a business, he/she is prohibited from remaining as an officer, director, stockholder, or key employee of the same business. However, a short transitional period is permitted during which the seller may remain a consultant for a period not to exceed 12 months. Because an SBA guaranteed loan for the purchase of a business cannot be provided solely to an individual, the small business must be either a Borrower or Co-Borrower of the loan. In a change of ownership scenario, such as those described above, lenders must remain vigilant of the following requirements:

  • In a change of ownership described in 1 or 4, the small business and the individual owner(s) must be co-borrowers. Additionally, the note for the loan must be executed jointly and severally by the individual(s) who acquire the ownership and the small business whose ownership interest is being acquired. In the event the small business denies liability for the debt based on failure of consideration, the SBA may deny the guarantee.
  • In a change of ownership described in 2, the small business must be the borrower and the remaining owner(s) may be either co-borrower(s) or guarantor(s).
  • In a change of ownership described in 3, both the acquiring entity and the entity being acquired must be borrowers.
  • In a change of ownership described in 5, only the acquiring entity is required to be a borrower.

When funding a change of ownership, lenders must carefully consider the SOP requirements and review relevant purchase documents in order to confirm that the loan is eligible for SBA financing. For more information regarding changes of ownership, review of purchase related documentation, or general commercial lending matters, please contact:

Chris Poling: cpoling@lewis-kappes.com

Kevin Morrissey: kmorrissey@lewis-kappes.com

Scott Oliver: soliver@lewis-kappes.com

Disclaimer: This article is made available for educational purposes only and is not intended as legal advice.