SBA Requirement of a Stock Purchase if Seller rolls equity

October 29, 2024

by a searcher from Harvard University - Harvard Business School in Denver, CO, USA

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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Reply by a professional
from University of Michigan in Detroit, MI, USA

Hi ^redacted‌, you're right, the transaction will need to be structured as a stock sale. Every now and again, I hear rumors that some SBA lenders have blessed the traditional asset sale / rollover structure. But I've never seen confirmation of closing (I believe it is loan officers agreeing to it in an attempt to win business, only for the bank's lawyers to knock it back later).

When it comes to structure, you can allocate the liabilities to mirror an asset sale through use of representation and indemnification provisions (this is customary anyway). If the target is an S-corporation, you may be able to treat the sale as an asset sale for tax purposes too (either through a tax election or an F-reorg).

We've help many clients close SBA stock deals where the seller retains equity. Happy to discuss further. Either DM me here or reach out directly at redacted

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

You are absolutely correct, if you are doing a partial business acquisition via an SBA 7A loan the SBA requires it to be treated as a stock or membership interest purchase. So the existing business must stay in place and be the borrower and the seller then ends up retaining a portion of the business post-closing. So it is not a true "equity-roll-over" in the traditional sense. I would say about 40% of the transactions we are doing these days are getting structured as a partial-business acquisition via a stock or membership interest purchase. The ability to keep the seller in the company post-closing is attractive to many buyers for a wide variety of reasons. If you need assistance happy to have a discussion about the pros & cons. One of the biggest negatives can be the accounting treatment, but the F Reorg is a great way to get around it. If you have questions you can reach me here or directly at redacted

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