Owner/Seller remaining with the business beyond 12-months

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October 11, 2021

by a searcher from Towson University in Portland, OR, USA

I'm looking at an engagement with 3-owners who all handle sales and customer relationships. They are willing to stay on for >12 months as employees.

If that were the plan, would that render this deal SBA-ineligible?

Is there any way to work around this and maintain SBA eligibility with a different sort of employment structure?

Anyone with any experience or advice for retaining an owner(s) as managers/employees for an extended time?

My gut reaction isn't great here, but curious how others see it.

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Reply by a searcher
from University of Kentucky in Houston, TX, USA
Devin: I don't have any direct experience with SBA eligibility -- there are very qualified people here to offer that advice. However, I would highly recommend that you reconsider the idea of partnering with sellers over a long period of time. I don't know your deal structure, but unless there is a good financial incentive for the seller to be involved (by way of a delayed payout or a meaningful equity position post sale) there is very little incentive for a seller to be involved and help you with growth. However, in-spite of this lack of motivation, given that they "used to" be the owner, they will insert themselves in most to the decision-making which could be an impediment to your plans for the business.

I have had experience with two such deals (different structures -- one a consulting engagement, and the other a meaningful equity position) -- and in both of them we ending up terminating the relationship with the seller (terminating the consulting agreement in one, and taking out the seller's equity position in the other).

Some food for thought!

All the best!

Regards,
Madan.
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Reply by a searcher
from Harvard University in Dallas, TX, USA
One way around this is to have them role, some small portion of equity which is now allowed under the new SBA rules. They will likely want to stay under 20% each as that would invoke a PG requirement from them.
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