Path to retaining a minority owner beyond 1 year with SBA?

searcher profile

January 06, 2023

by a searcher from University of Oxford in Bainbridge Island, WA, USA

Based on my understanding of SBA financing, previous owners can only work at the company for up to 1 year post acquisition. I'm looking at a business now where there's a key employee who has ~3% ownership of the company (due to some incentive comp plan). Does anyone know if there are any common/acceptable routes to keeping an owner with such a small % ownership on beyond the 1 year mark post-acquisition when using SBA? Thanks! 

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commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
As the current SBA rules stand, you would need to buyout 100% of the company. Anyone you bought out you could not guarantee up front employment beyond one year. Unfortunately you cannot partner with the 3% owner to buyout the rest of the business based on existing rules. You would need to buy him out as well. He could buyout the business but he cannot bring outside partners in to do so based on today's rules.

So your options are to have the seller buyout the majority partner in advance. For you to buy both out at closing. There is a possibility due to the non-controlling ownership interest a lender would allow them to stay on beyond one year. Happy to discuss this.

Also happy to discuss how the rules work for the one-year employment contract. I can be reached here or at redacted if you would like to discus.s.
commentor profile
Reply by an intermediary
from Boise State University in 800 W Main St, Boise, ID 83702, USA
To purchase a business using the SBA loan program, the buy out must be 100%. That being said you and the 3% owner could partner up to purchase the other owner(s) out, Then you and the current 3% owner would own 100% of the business.
commentor profile
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