Can a minority owner (10%) stay on for more than a year w/ SBA?

February 03, 2022

by a searcher from University of California, Santa Barbara in Fort Lauderdale, FL, USA

Hi All,

Question for the community: I understand that the SBA prohibits ongoing owner involvement in the business after an acquisition is made with a 7(a) loan; owners may remain involved as a consultant, for up to a year. Is there an ownership threshold below which a minority owner may remain involved for a longer or indefinite term? For example, let's say there is a 90% owner/founder who wants to retire, and a 10% owner/employee who wants to remain engaged long term. Is there any way to make that happen?

Thanks in advance!

Reply by a searcher
from Hillsdale College in New York, NY, USA

You might be able to structure synthetic equity for the 10% owner that converts to real equity on exit after the SBA note is paid. Also may be able to create a "management equity pool" that lets the 10% seller earn back his portion. Lastly, I think he could sell and immediately re-buy as one of your LPs and since he's less than 20% of the ownership. It's not tax efficient for him, but should work.We don't use the SBA for many reasons (and this among them), but I have to believe it's possible if you're creative and everyone is committed to the sale.

Reply by a lender
from University of Missouri in St. Louis, MO, USA

the short answer is no.The long answer is there is a remedy for this if you have time on your side.Essentially you buy into the business as a minority partner in the interim.After a period of time you and the other 10% owner buy out the majority owner.I vetted this last year and the SBA (through general processing) was fine with this.It isn't clearly defined the amount of time you have to be an owner is the only quirk.Feel free to email me to redacted

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