What are the rules regarding return of capital to equity holders under SBA?
December 02, 2019
by a searcher from Harvard University - Harvard Business School in Charlottesville, VA, USA
Hello all,
With the recent changes to the SBA program, I understand that the seller portion used in lieu of equity must be on full standby for the life of the loan. However, what happens to the actual equity portion? Can dividends be paid out/are there new restrictions? And can capital be returned if the business is performing well? This may be a basic question but significantly impacts the IRR portion of the math even though cash on cash return may still be the same.
As an example, let's say there is a $250k EBITDA business purchased at $1M with 800k SBA loan and 200k preferred equity. Suppose the SBA is ~8% interest rate and there is 8% preferred return on the equity.
- The SBA per year amortized payment is ~$116k
- The preferred return piece per year is $16k
So based on the above scenario, there would be still be###-###-#### = 134) $134k of EBITDA left after paying the SBA amort.
So the 1st question is, can the business now pay the $16k preferred out to the equity holders?
The second question is can the business do a return of capital and return say $30k to the preferred equity holders?
Are there any additional consideration here we should be aware of?
Appreciate any insight.
from Michigan State University in Newport Beach, CA, USA
1) The full-standby requirement is only if the seller note is part of the required 10% down (so 5% in cash, and 5% seller note).. If the buyer puts 10% down in cash, this satisfies the SBA injection rule, and seller notes can then be on any term you want, as long as the lender and cash flow allow.
2) This addresses a potentially related topic. One concern would be surrounding 10% injection and money coming back to the buyer due to specific Note reduction verbiage. As long as the injection portion remains "eligible", then whatever happens beyond that should be ok. When an underwriter looks at the verbiage, it can't appear as though the 10% injection rule won't be met if anything changes, i.e. money going back to the borrower, from the seller, at some later date. Technically, this could thus make the loan ineligible if the borrower ended up putting in less than 10% when the full process was complete.
in Yorba Linda, CA, USA