Mechanism for Asset Sale with Owner Retention and SBA Eligibility

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August 06, 2024

by a searcher from University of Alberta - School of Business in Miami, FL, USA

Hello everyone,

I am looking to understand if there is an existing mechanism to acquire a company through an asset sale while allowing the owner to retain ownership in the new structure and still make it SBA eligible. Our goal is to achieve a clean slate compared to a stock equity acquisition.

Thanks for the insights.

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Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
Adding details to ^redacted‌ comment: It seems seller can retain ownership in an Asset sale.

There has been a recent update to SBA procedures regarding partial changes of ownership. On December 6, 2024, the SBA issued Procedural Notice###-###-#### , which provides several important updates to SOP###-###-#### The key changes related to partial changes of ownership include: Multi-step partial changes of ownership: The SBA has added language to allow partial changes of ownership that occur through multiple steps, resulting in a new entity owned by some or all of the original business owners plus one or more new owners5. Equity requirements clarification: The notice clarifies that the required cash contribution for partial changes of ownership must increase the business' debt-to-worth ratio based on the current quarter's balance sheet prior to the change in ownership4. Loan maturity update: The SBA is now allowing loan maturity for all types of changes of ownership, including partial changes, to be based on a blended maturity of the business' assets. Additionally, if 51% or more of the loan proceeds are for real estate, a loan maturity of up to 25 years is permitted5. Co-borrower requirement: The notice reiterates that both the business and the person(s) acquiring the ownership interest must be co-borrowers on the new loan4. Guaranty requirements: The SBA clarified that to determine who must provide a guaranty, the percentage of ownership is measured based on beneficial ownership
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Reply by a searcher
from Pennsylvania State University in Brookhaven, NY 11719, USA
I'm closing a deal where we were able to work around the SBA rules against retained equity percent value through a convertible note carrying AFR without a P&I schedule. We simply make payments quarterly based on free cash flow. Conversion is triggered upon a refi of the SBA note, or change in control. If no principal remains at any point during the SBA term or when there is a conversion trigger, we tied a warrant that the seller can redeem in exchange for the negotiated equity value.

It was complicated and took a lot of back and forth with our lender. Be patient, but it's possible to do.
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