How is everyone planning for upcoming SBA changes?
December 23, 2022
by a professional from Vanderbilt University in Austin, TX, USA
One thing I've been tracking recently is the potential update to rules governing the SBA 7a Loan Program, commonly used by entrepreneurs to buy small businesses. Here’s the change:
"SBA proposes to revise § ###-###-#### …to allow use of 7(a) loan proceeds to fund partial changes of ownership. SBA is proposing to make this change to assist small businesses and provide a path to ownership for employees.”
This is groundbreaking because it would allow SBA-financed partial acquisitions, which could materially increase the flexibility of the program and lead to the development of new financing strategies within our industry. When I asked senior SBA lender Jared Johnson about it, he highlighted that the current rules require a buyer to acquire 100% of a target company, creating material constraints on the number and types of transactions that can be financed through this method.
This is particularly true in industries that have professional licensing requirements. Any buyer that lacks the proper licenses going into the transaction would face a potential interruption in the company’s ability to do business in the event that its license lapses upon the owner’s exit.
If partial acquisition rules are relaxed, the current owner could maintain a portion of the company’s equity in an acquisition, maintaining their license and therefore avoiding such interruptions.
Currently, the parties are trying to assess the real impact of this major change. Important questions remain, including: who would have to be a guarantor in a partial buyout? What can be done with the funds – can they go to the seller or do they have to be put into the business?
The comment period on the proposed changes closes soon, on December 27. You may submit comments, identified by RIN 3245-AH87, through the Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions there for submitting comments.
Curious if this rule change is impacting your deal structure plans at all. Would love to hear your thoughts!
from The University of Chicago in Chicago, IL, USA
As I read the proposal, I felt that the objective is to provide employees a path to ownership. I was concerned that owner continuity may not apply to a non-employee. I contacted the higher ups at SBA involved with such policy making. The reply is "The intent is for employee ownership, so new buy ins may not make the cut".
There are many details to be worked out even for partial employee ownership. If the proposal moves forward, such details will be worked out during rule making phase.
from Vanderbilt University in Austin, TX, USA