SBA 7a - New Informational Notice

May 29, 2025

by a professional from Georgetown University in Maryland, USA

The SBA released an Informational Notice clarifying the changes to go into effect on June 1. The below summary is of note for SBA 7a Searchers - 1. "Search Funding" crackdown. a. Control. The Borrower must be in Control. Lenders will likely interpret this very broadly. It will likely impact the bundle of customary minority protections investors like to have (veto rights on things like, selling the company, issuing new debt, affiliate agreements). The borrower will almost certainly need to have control over distributions and other fundamental management rights. b. Return of Capital. The SBA is clarifying that investors are now prohibited from receiving priority repayment of their equity prior to the SBA loan being repaid. This is not 100% clear to me, but while it appears this may be implicating a preferred return, I actually think this is only referring to a Put Right, not a preferred return, but it is unclear. 2. Partial Change of Ownership (i.e. Rollover). Any partial change of ownership will require all investors (regardless of percentage) to personally guarantee. The Rollover Seller will also have to PG the entire loan for two years. As we have known, if anyone still wants to do this, it will also have to be structured as an equity acquisition. This came from Information Notice to SOP###-###-#### released today.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

For clarification, for the most part these rules were already in place regarding minority investors. The primary buyer / guarantor was supposed to be in control, the ownership could not change during the term of the loan, and technically there were not allowed to be any mandatory repayments of seller investment prior to the SBA loan being repaid. However, I am not sure if all lenders were strongly following this guidance in their review of operating agreements and investor agreements. So for the most part I think this is a clarification of the rules already in place and guidance for lenders to enforce them. As for the partial change of ownership, this is verification of a ruling that went into place with the last update in April that takes effect May 1st. There was some confusing language in the previous SBA release that made it unclear that minority investors in a partial business acquisition would need to be co-borrowers, in essence personally obligating them to the loan. Although I had hoped they would not require it, unfortunately they have clarified the language and reaffirmed it with this update. So if you are going to be a minority investor on a partial business acquisition, even if you only own 1%, then you would be required to be a co-borrower. Again, this only applies to partial business acquisitions. I hope this additional information helps.

Reply by a professional
from University of Southern California in North Palm Beach, FL, USA

Good to see another smart (recent) decision from the SBA. What good is a personal guarantee on the person who runs the searchfund who may or may not manage the business, who may or may not have significant experience managing that kind of company, and who may not have enough money or income so the personal guarantee has any value to the lender? Perhaps the SBA or our government is paying attention to the failure rates, and the reasons thereof, of the searchfund investments? Or maybe noticing the lending standards in other countries? Next, we can expect the lobbyists and the payoffs to encourage dumb lending.

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