SBA Lenders doing Asset Sales with Seller Equity in NewCo

July 10, 2024

by a professional from University of North Carolina at Chapel Hill in Atlanta, GA, USA

There is a strong restaurant services business that I am speaking to that has a hood vent cleaning division doing $4M in recurring service revenue with 20% EBITDA margins. They are considering doing a divestiture of this division (which has decent separated financials), but in order to make this work, I need to have the seller hold <20% equity in the NewCo.

Since the existing company would continue to operate with its other divisions, this would be an asset sale to NewCo. I have heard varying feedback from a few SBA lenders about whether a seller is allowed to hold equity in NewCo with an asset sale. Many have said that is not allowed under SBA rules (so, seller equity only allowed under a stock sale), but some are willing and say they have done asset sales with seller equity before.

I'd love introductions to any SBA lenders (or conventional lenders) who think they could make this happen.

Thanks in advance!

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

Interesting situation. To provide some background for reference, we are a Commercial Loan Brokerage shop with over 500 funding partners and roughly 80 SBA funding partners. The updated SBA SOP is pretty clear. If you are doing an asset purchase the transaction does not qualify for the partial business acquisition. You must be doing a stock or membership interest purchase. If you are doing an asset purchase, it is not possible for a seller to role equity. So I just do not see the SBA working for you.

There is always the chance a lender could try to submit this request directly to the SBA rather than use their preferred lending status and see if the SBA would approve the structure because of the uniqueness, but even doing that I would not necessarily recommend. First, I think most lenders will not want to waste the time knowing there is a good chance the SBA will not approve it. Secondly, I am not sure you want to waste the time when it is likely the SBA would not approve it.

My recommendation would be to look for some non-bank lenders to assist or if you decide to use SBA, rather than have the seller directly involved, I would have the seller sign a big seller note with forgiveness built into it and try to keep them tied into the deal that way. I would be happy to take a look at the deal and see if there are some other creative options to structure something. You can reach me here or directly at redacted

Reply by a searcher
from Harvard University in New York, NY, USA

I'm wondering if one of the following "workarounds" could be possible:
1. Have the seller setup a different legal entity to invest in the acquiring entity. I imagine the SBA may scrutinize the control folks / owners of the selling entity and this entity and the seller may not want to have another legal entity for this.
2. Complete the asset deal with an X% seller note held by the selling entity and then after the deal is closed convert the debt to equity. This would take some pretty strong trust between the buyer and seller if the seller highly preferred owning a percentage vs holding the seller note, but I could see ways to incentivize the buyer to complete the conversion after closing, including a high interest rate or higher seller note principal than their equity position would (e.g. deal is agreed to be 2M with 10% seller ownership so 200K in "rollover" equity, but you guys could agree to 2.1M with 300K seller note and have an understanding that you will exchange that seller note into 200K of equity (common or pref based on what you agree).

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