SBA objection to NWC peg for 7(a) loan?

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March 16, 2023

by a searcher from University of Illinois at Urbana-Champaign in Ann Arbor, MI, USA

I'm in final stages of loan commitemnt for 7(a) loan. The LOI and now draft SPA include a post-closing true-up of NWC.

Belatedly, the “compliance team” at one of my lenders raised a concern that SBA 7(a) loans do not allow any sort of purchase price adjustment post-closing, esp., wherein the consideration can go up (which can happen in this case, if NWC at closing turns out to be below the peg).
I pushed back noting that truing-up NWC post-closing is a customary aspect of transactions like this one. I also noted that the whole point of the true-up is to ensure that the Seller doesn’t “game” collections in the run-up to closing to harvest cash and deliver a hollowed out balance sheet. It's designed to protect me, my bank, and the SBA! My bankers grant both points, wholeheartedly. They have gone back the compliance people in hopes to straightening this out.

Has anyone seen this type objection?

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commentor profile
Reply by a professional
from The University of Alabama in Birmingham, AL, USA
I don't know enough of the specifics here to say one way or the other, but the compliance team is likely right. SBA wants the transaction to be completed at closing. Adjustments after the fact would alter the effective purchase price of the business, and alter what would have been the required structure to begin with. Even if potential changes would have fit the box to begin with, compliance on post-closing items would be more of a nightmare than they already are.

Most often we see SPAs containing minimums or ranges for items such as inventory or A/R. Get a check on it a few days prior to closing just in case anything needs to be adjusted, then finalize the count as close to closing as possible.
commentor profile
Reply by a searcher
from Harvard University in Greenwich, CT, USA
Yes, I've heard this as well. Apparently a common SBA position because of the rules - even though it is in your favor and therefore to their benefit.
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