SBA loans with retained seller involvement - any creative solutions?

searcher profile

May 03, 2021

by a searcher from Anderson University in Canton, OH, USA

I'm looking at a couple of potential deals where the selling owners prefer offers that retain their involvement for extended periods after closing (1 yr+). Given my vision for growth, this may also be ideal for me in these cases. I would also like to take advantage of some of the current SBA incentives, and I like the flexibility of the extended amortization compared to traditional senior debt. However, as far as I understand, the SBA requires 100% change of control for 7a loans and restricts post-closing owner involvement.

Given all of this, I'm trying to understand if anyone has any creative solutions to use SBA debt while also retaining seller involvement, or otherwise negotiating around this conflict. Is there a type of involvement that would be allowed? Does it make a difference if they convert to independent contractors? Do the rules differ the selling owner who stays is a minority shareholder?

I've discussed with a few different banks and gotten different responses varying from - "No chance, must use conventional loan." to "12 months contracting is ok, and probably ok after that too as long as the bank doesn't know about it." Tips or outside resources appreciated.

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commentor profile
Reply by a lender
from California State University, Sacramento in Seattle, WA, USA
Food for thought. Talked with one of my clients today that closed on his SBA transaction about 6 months ago. He can't wait for the seller to get out of there. Conventional loans have different expectations for seller equity roll and seller transition post close which are common for conventional deals. FOR SBA loans, my observation is that many buyers turn out wanting the seller to vacate much sooner than originally conceived. I'd reach out to your CEO peers out there that have closed on SBA loans to get their advice.
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Reply by an intermediary
from The University of Michigan in Bonita Springs, FL, USA
Our understanding of the SBA requirement is the Seller cannot remain on payroll for more than 12 months. We've been able to get around this by having Buyer and Seller agree to take the Seller off payroll after month 12 and move them into a part-time 1099 consulting, advisory, or commissioned sales position. Per Lisa's comment above, most of the time before the end of year one, the Seller has lost some motivation or has become a distraction and there are better options for the Buyer than keeping the old owner around.
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