Anyone had a certificate of good standing hold up an SBA loan?

October 13, 2023

by a searcher from University of Portsmouth in Houston, TX, USA

I am closing on a 7a SBA acquisition loan and going through the final closing checklist with the lender.

One of the requirements is a Certificate of Good Standing from the sellers state of taxation. In my deal, that is the State of Virginia.

Seller wrote to obtain the cert back in August and the State replied a month later that there was a missing tax year from###-###-#### the entity is 30 years old). They didn't issue a certificate, but didn't admit any taxes were unpaid, either. Weird, right.

Lender is seeking counsel on how to handle the issue as we don't have the certificate, seemingly, cannot obtain it, either. We have tried to articulate that: A) Statute of limitations is 7 years in Virginia and 10 years Federally. B) Asset purchase agreement indemnifies me as buyer from unpaid taxes. C) Me the buyer is using a new entity in a different State to buy the business.

It just seems to me that this should be an issue that pragmatic minds can overcome. But at the same time it feels like a torpedo and my anxiety is through the roof.

Has anyone faced a similar issue before? How did you overcome it? Any help appreciated. Thank you

Reply by a searcher
from Virginia Polytechnic Institute and State University (Virginia Tech) in Blacksburg, VA, USA

This very well could hold up the deal. If bank counsel comes back and insists that it be remedied, propose that some fraction of the funds be held in escrow, released post-closing upon condition of seller obtaining the certificate. That usually works for situations like this. I had something very similar happen during an acquisition last December and this is how we resolved it.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Roger's advice is great. Unfortunately the Bank has to verify the business is in good standing legally to be sure the business is available for sale. It seems a bit weird as every other document covers it, but if the Bank closes, the deal goes bad, and they did not have that, the SBA could refuse their guarantee. Hopefully you can find a solution.

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