How does the SBA follow up on post acquisition?

September 16, 2021

by a searcher from Emory University - Goizueta Business School in Marietta, GA, USA

Team, I hope you are all well out there. As I'm reviewing CIM's and looking to inject myself as CEO of a company, I see many organizations where the seller(s) would like to stay on board. But the SBA 7(a) loan states that they can't remain for more than 1 year. So how does the SBA check that? Can the seller do anything past that year? Or do they have to divorce the organization fully?

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Reply by a lender
in Yorba Linda, CA, USA

Jason, having the seller as an ongoing Board member would probably be problematic as doing so creates a paper trail that technically shows a violation of SBA's policy. To answer your question, I have never seen a bank request ongoing proof that the seller has exited the business after the first 12 months. So, while it's unlikely for the lender to "police" this, it is always possible that it could come up later and cause you some challenges in your lender relationship. Finally, in most cases with small companies that are of an SBA-lendible size, we have found that the new CEO's actually wanted the seller to exit for a variety of reasons.

Reply by a professional
from Marquette University in Kirkland, WA, USA

This comes up all the time. My most recent client deal had one of four sellers wanting to stay on and the word from the bank was what I've heard from many banks, "It can't be longer than one year in writing." After one year it's at-will employment. The same goes for any advisory role like consultant, board member, etc., it can't be in writing. Caveat: some banks will be more stringent on stating this guideline than others. However, if you're making the payments, your debt coverage ratio is inline, etc. I doubt the bank will look at it or care.

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