Stock sales and the SBA

October 09, 2023

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

Hi there everyone!
I'm looking at acquiring a business that would effectively double my current operation.
I would like to refinance my current SBA loan (variable rate, so interest rates aren't a big deal) and otherwise streamline our legal entities by creating a new company into which I put my current assets along with those that come with the purchase.
A wrinkle though, is that one of the two sellers would like to roll a large portion of equity into the new company (it would be about 10-13% of the combined company) and stay on as the General Manager of the newly-acquired location. A banker has advised me that this is only possible if it is a stock purchase.
From what I understand, this has significant tax ramifications because the goodwill in a stock sale is not depreciable.
Are there any structures that can help me end up where I'm aiming to be without losing this valuable depreciation? Are there other things to be considering?
Thanks in advance!

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

I agree with Lisa, the stock sale is a requirement by the SBA. In theory you could use your existing holding company to buy the stock of the business and hold the stock in the name of your existing holding company. But the primary borrower needs to be the existing company and the seller would continue to retain ownership in that existing company. As far as rolling equity, you cannot do a true equity roll with an SBA loan, so if you want to give them equity in the combined company you really cannot do that under the SBA rules.

The other issue you might run into depending on the structure of your existing company is refinancing your existing SBA 7A loan. If you are looking to refinance that into another SBA 7A loan that is unlikely to happen. It is very, very hard to refinance an SBA 7A loan into another loan. You could look at conventional financing options, and although you might get a better interest rate, you would likely have a shorter amortization. However, if the loan is under-collateralized it might be a challenge doing it conventionally in this tight credit market right now. You might just have to do a separate SBA loan for the new purchase.

If you would like to discuss and see if there are additional options I would be more than happy to do so. You can reach me here or directly at redacted Good luck.

Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

1. retained Equity" and "Roll Over Equity" are two different things.
2. Retained Equity as allowed, or to be allowed, by SBA is a non-workable. I have explained this one-on-one with many SBA lenders. It will not, and cannot, achieve the expected outcome by buyers.
3. In your situation, consider Asset purchase of 100% of Target, have a Holding Co with two assets, and have Seller of the Target buy equity into the Holding Co. It may be possible to merge the two assets of the Holding Co into one entity, but I do not know.

+6 more replies.

Join the discussion