SBA rule change - Any partial change of ownership deals funded?
October 10, 2023
by a searcher from Texas A&M University in Austin, TX, USA
I'm under LOI with partial change of ownership terms. Great niche, recurring revenue, solid team.
The seller is not willing to PG. Seller is retaining a 7.5% share with limited rights -- equity roll with no operational role. We both love this arrangement.
I'd like to meet anyone who's funded a deal with a similar structure. If you are, please reach out on the thread or DM.
I'm working towards terms sheets with 4 lenders, all of them very helpful. It's been fiendishly hard to get consistent answers to the following questions:
1. Will the seller need to PG?
Specifically, will the SBA require the PG for a minority interest, regardless of what the bank's underwriting rules are? 3 say no, 1 says yes. One flipped from yes to no PG this week, which is great. ...I think. One wrinkle in our case: The seller bought out his partner 13 months ago, so seller's own equity share changed in the last 13 months. One lender thought this was a key point.
2. Can this be approved with the preferred lender program, or will it likely get "general program" treatment for all lenders?
Basically, is the SBA looking at every early buy-in deal 1-1? Are they letting preferred lenders use their own discretion for these early ones? I've heard both "very likely" and "very unlikely".
3. If I sign a loan commitment letter with this structure and it doesn't fit the most recent interpretation of the rules, does the deal fall apart?
For example, this scenario plays out:
- The loan goes to "general program" because the SBA is checking each buy-in 1-1.
- The SBA underwriter requires a PG based on that person's interpretation of the current guidance.
= The seller is not willing to PG, so the loan is denied.
- The way I understand the rules, denied projects need to cool off for 3-6 months before re-applying. This is the maximum downside risk in my mind. Seller and buyer would revert to a 100% sale to keep the deal moving rather than risk this, even though this is not desirable for either of us.
I'll send a handwritten thank you note to anyone that's actually funded a partial buy in, either as a borrower or a lender. I'd like to know what you experienced!
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
If the rule changes in the future it can impact your deal depending on where you are at in the process. If you have gotten to the point where the loan is approved and the authorization has been pulled from the SBA you will be good as the rules that apply to your transaction are based on the date that authorization is pulled. So even if you close later, you will close under the old rules. Once your loan is closed the rules in place at that time stay in place. If your deal is not approved and the rules change then it will change your deal.
I have lenders approving it with the preferred lender program as well as some submitting directly to the SBA. So both options are available. If you need any additional assistance please do not hesitate to reach out to me directly at redacted
from The University of Chicago in Chicago, IL, USA
In a levered transaction, post-transaction equity ownership by all investors is Pari-Passu to capital contribution. Therefore, for price P, if seller rolls over 10% of P, buyer puts in 10% of P and debt is 80% of P, then the seller owns 50% equity post-acquisition. If seller rolls over 4% of P, buyer puts in 16% of P and debt is 80% of P, then the seller owns 20% of post-acquisition equity.
Lack of understanding of this by buyers, sellers, brokers, accountants, and lenders is very common. As a result, deals advance all the way to purchase agreement. Deals fall apart just before closing when the attorney asks for the flow of funds statement and capital stack.
Also, x% "retained ownership" implies buyer buying (100-x) % shares from the seller.