SBA 7a Loans and continuation of ownership?

March 11, 2022

by a searcher from The University of Chicago - Booth School of Business in Chicago, IL, USA

I'm pretty new to SBA loans as I typically avoid them due to the PG but I currently have a deal under LOI I think is a great fit to be refinanced with one shortly after acquisition. My limited understanding on SBA 7A loans are that old owner's are not allowed to continue ownership for more than 1 year. Have any searchers found creative work around for that to keep owners of the old entity engaged in equity ownership?

I'm also curious what constitutes "ownership". If the old owner for example lends money to a vehicle that buys out his equity with all debt and then you purchase that entity does that get you around "ownership" or a lender from the old deal can be considered ownership as well? I'm open to any and all thoughts here and thought it might be a good post topic for more complicated financing structures in small deals

Reply by an investor
from Indiana University at Bloomington in Austin, TX, USA

The work around I found (and vetted with a few SBA folks) is to have the owner become an employee of another entity (in my case, my advisory business). If you don't have another entity, form one. As an employee, they would then consult and work with the acquired entity and be paid via our advisory service. You could have the entity you are acquiring pay a management fee to the other entity, which you then use to compensate that person. Check this with your specific lender before you try it. If they won't do it, shop around for another who will.

Reply by a lender
from University of Michigan in Indianapolis, IN, USA

Hi John.Curious about "refinance with SBA shortly after closing"?Any seller debt has to season for 2 years before its eligible to be refinanced.All other debt has to season for a year before its eligible to be refinanced.I dont believe any of the real players (lenders)in the SBA space allow for seller's to still participate in an active roll with the business beyond 1 year post close.Regardless of how many shell companies are established.Happy to provide some unpaid consulting if you want to discuss further.

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