Distributions in partial change of ownership

searcher profile

February 27, 2025

by a searcher in Denver, CO, USA

I am looking for guidance on distributions in the case of a partial change of ownership using and SBA loan. Let's say I acquire 90% of a business from the seller via stock sale using an SBA loan. I own 90% and she (seller) now owns 10%. Given this breakdown, for every dollar I distribute to myself, she would receive ~11 cents. Since I have taken the loan out on the business, are the SBA principal and interest payments essentially distributions to me, which I use to pay down the loan? I.e., if I/the business pay $100 in principal and interest in year 1, is she due ~$11, whether it be a cash distribution to her, or an increase in her capital account? Or, if we decide to distribute all cash leftover after SBA payments, does she simply get her 10% share of this post-debt cash flow?

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commentor profile
Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
1) SBA debt is Company debt. It is not your debt even though you are the guarantor. Hence it is not a distribution to you.
2) In a Stock purchase, Cash (your equity + SBA loan) is paid to the company's shareholder. How does such Cash payment wind of on company balance sheet? I have answered this on other threads. At a high level, you either have to file a consolidate tax return, or more likely, you buy new shares from the company with your equity $, then the Company borrows from the SBA and then the Company redeems current owner shares such that you have 90 shares, and current owner has 10 shares. Happy to discuss more. I have asked many, many, many, CPAs and SBA lenders; most of them cannot clarify this subject.
3) Make sure you clarify to the seller the meaning of 10% retained ownership. Example: Assume Price is $5 Million. You are buying 90% for $4.5 M (= Equity of $600 k + SBA $3 M + Seller Note $900 k) and seller leaves $500 k for 10% Equity. If so, you are getting 90% for $600 k and seller is getting 10% for $500 k. I have seen many deals falling apart on 11th hour when seller learns of this. I have also seen deals close and seller learning while filing the taxes few months later that his/her 10% is not worth $500 k; it is worth ~$60 k. Seller will do everything in his/her power to hurt the buyer.
4) This problem does not arise in an Asset purchase. Earlier, Partial Ownership Change (PCO) was limited to Stock purchase. I have talked to SBA about the above problem. Thankfully, SBA now allows PCO in an Asset purchase also.
commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
I concur with comments already made above. The SBA loan is a loan to the business. It has the priority over all cash flow. Any agreements with investors and the seller will need to be subordinate to the Bank loan at time of closing. There cannot be any required mandatory payouts to either investors or the sellers as part of the sale as that is not allowed. They can only be discretionary, meaning they are subordinate to the SBA debt. The remaining owner needs to understand that they only get distributions if you take them out beyond debt service, and agree to pay them. I hope this helps.

If you would like to discuss further or have other lending related questions due to a partial change in ownership, please let me know. You can reach me here or directly at redacted
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