The SBA updated their SOPs within the last 12 months allowing for sellers to retain equity in the new entity. What I didn't realize until recent discussions was that in this scenario, the SBA requires the transaction to be treated as a stock purchase. Given that a lot of the SBA guidelines are "in the gray," I was curious whether anyone has experience in executing an asset deal in this situation (i.e. seller maintaining interest in the go forward) or if anyone had any feedback (good or bad) executing a stock deal in a situation where you had originally planned on an asset deal. Thanks all for your perspectives!
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1) Seller CANNOT retain or buy equity into a new entity.
2) Transaction HAS to be a stock (membership) purchase of Seller entity.
3) Borrower is the seller entity. Lender will not pay the seller owner directly. Lender will send funds into seller entity. Then seller has to redeem its shares (if seller retaining 10% of existing company, then seller will redeem 90% shares). This will, most likely, create negative net worth. It will take years to turn this positive. Such negative net worth may be problematic for some businesses.
4) Further, seller's retained 10% will be worth pennies, not 10% of the Enterprise Value. This could derail the transaction if seller does not fully understand it up-front. Many times, seller, and his/her advisors, discovers this after the closing at tax filing.