Any changes regarding "expansion" loans under SBA?

We put together a pretty comprehensive list of changes. Those most likely to impact acquisitions are outlined below along with my commentary after. By the way, you are correct that you cannot use seller standby notes for any of the required 10% minimum equity injection. It must be 10% true equity, with no more than 5% from equity partners. This is for first time buyers. If you already own a business and are doing an expansion, the lender have flexibility within reason of what they will allow. 10 You can no longer use the SBA Small Loan Program (loans $350,000 and less) to finance business acquisitions. - This appears to be an appropriate change and we found few Banks would use this program for business acquisitions to begin with. Going forward that means you would need a minimum loan of $350,000 to qualify for SBA financing for a business acquisition. 2) You can no longer borrow more than the value of a business, even if it includes seller notes on partial standby or with forgiveness. The total debt including seller notes cannot exceed the business valuation. The only way to get around this would be via the use of seller-notes on full standby for the life of the SBA 7A loan or by providing additional equity. Seller notes on full standby are viewed as equity by the SBA, so by using these notes or bringing more than 10% cash to the table, you can pay more for the business then the business valuation. - This is going to make it hard to get sellers the prices they are looking for on quickly growing businesses or businesses that have only been profitable for a limited period of time. The benefit to buyers is that sellers are going to have to be more reasonable in the prices they are seeking if they wish to allow buyers to use SBA financing on their transaction. 3) The transitional period for sellers to stay in a deal has been extended to 24-months. - This is a big change and will provide buyers more time to deal with potential licensing issues for license heavy businesses. 4) Securing a 25-year blended amortization by combining real estate and the business acquisition is no longer possible under the new SOP. If the real estate and business are financed into one loan, even if the real estate is more than 51% of the purchase price, a standard blended amortization will be used going forward. - This will take away a major advantage in real estate heavy transactions where the 25-year amortization could significantly reduce the monthly debt service on the business acquisition portion of the debt. We are likely to see more two note structures, one for the business and one for the real estate, and more SBA 504 mortgages when real estate is included in the transaction going forward. 5) Seller notes on business acquisitions will not be eligible for refinancing until they have 36 months of repayment (this excludes standby periods). So SBA financing cannot be used to take-out seller notes in short order. - This rule will remove one option that was available for sellers to refinance their debt sooner. 6) For an “Initial Acquisition” for a buyer (appears to refer to a buyer that does not already own a business), the required 10% down payment can no longer be reduced or eliminated. So seller notes on full standby for the life of the SBA 7A loan can no longer count as part of the required 10% equity on the transaction. - All buyers are now going to need 10% equity outside of the seller. You can still have a seller note on full standby, but it will not count as part of the required equity. 7) At least 5% of the required down payment must come from the buying principals / guarantors. Investor equity and borrowed funds cannot count as more than 5% of the required equity. - Buyers are going to need to have seasoned equity (cash in their bank accounts for at least 60 days) in place in advance of going under contract that meets the 5% requirement in order to qualify going forward. 8) Minority Equity Investments can only be considered equity if they meet the following criteria: 1) the investor must have less than 20% equity and exert no control over the business; 2) distributions to the investor outside of distributions for tax obligations are prohibited until the SBA 7(a) loan is paid off; and 3) additional equity investments beyond the required equity may receive standard distributions subject to any agreements by lender such as a DSCR requirement. - The restriction on equity distributions is actually an improvement, especially for equity beyond the required 10% down. Previously no return even for taxes could be provided. 9) The debt service coverage ratio (“DSCR”) must be satisfied using either the last fiscal year-end or an average of the last two fiscal year-end statements on either a historical or adjusted basis. Initial Acquisitions will require a 1.25x DSCR, Business Expansion a 1.15x DSCR, Owner Buyouts a 1.25x DSCR, and ESOP and Cooperatives a 1.25x DSCR. - This is tightened from a 1.15x minimum DSCR under the previous SOP 10) Any seller debt not in full repayment such as interest only for an extended period of time, must now be included in the DSCR calculation based on an amortization not to exceed 10-years. This does not include seller debt on full standby for the life of the SBA loan. - This will eliminate the ability to use interest-only short-term balloon notes to lower the DSCR on seller debt. 11) On any business acquisition where the business purchase price (excluding real estate) is $3 million or greater, the SBA lender will be required to order a Quality of Earnings report with the only exception being Owner Buyout and ESOP & Cooperative transactions. In addition, the lender must use the earnings from the QofE to meet the DSCR requirements for the loan. - This is a substantial change and will likely require buyers to front significant cash for QofE’s without knowing if the transaction will still qualify. There will also likely need to be some discussion about what is contained in the QofE report to benefit both parties. It will be interesting to see if lenders approve loans prior to receipt of the QofE or if they will not underwrite and approve loans until after the QofE is received. 12) The SBA is requiring lenders to meet the tax transcript requirements for change of ownership. So tax transcripts will be required in all cases. - For changes of ownership sellers are going to have to have their taxes in order and transcripts are going to need to be available. 13) For Business Expansions and Owner Buyouts, the Lender may reduce or eliminate the 10% equity requirement “...if they have determined that the Borrower has sufficient liquidity and working capital to sustain operations following the transaction.” However, when eliminating the equity requirement the lender cannot include permanent working capital in the loan, but a separate line of credit can be provided. To qualify for the reduction or elimination of equity the balance sheet must not have a negative net worth as of the last fiscal year-end. - This is a change from the previous rules that were in place and gives lenders more latitude in determining when to require equity in certain transactions. 14) You can now add additional Guarantors with a business expansion. Previously the ownership had to stay the exact same for a Business Expansion to qualify for less money down. - This is a positive change in growing businesses. 15) For an Owner-Buyout transaction where you are buying out the other owners, you can now bring in outside investors but the outside investors cannot own more than 49% of the business and would be required to sign a full personal guarantee on the loan whether they own 1% or 49%. - This provides some additional support for owner-buyout transactions that was not available before. 16) Real estate associated with a change of ownership must have been owned by the seller for at least 36-months prior to sale. - This will put a restriction on the sale of owner-occupied real estate that did not exist with the last SOP. 17) Cash that comes from a personal loan to a guarantor where repayment can be demonstrated to come from a source other than the cash flow of the business (the salary paid to the owner by the business does not qualify) can count as equity. But this cannot count as more than 5% of the required 10% equity in a business acquisition. - I am not sure how practical it is for buyers to use such a loan unless they have a spouse with outside income that can support this loan and act as a guarantor as well. If you have additional questions or want to try to get a deal done before the rule changes take effect, you can reach me here or directly at redacted