SBA Guidelines Change: Partial Business Purchases Now Allowed
July 18, 2023
The Small Business Administration (SBA) recently announced changes to its guidelines, which will completely change things for those interested in a partial business purchase.
Though the SBA has long been a source of funding for business acquisitions, partial business acquisitions (which occur when an individual seeks to acquire only a portion or change the ownership percentage of a business) were previously not allowed.
In addition to requiring buyers to purchase 100% ownership of the business, the SBA also required the buyer to provide cash (or similar value) at closing equaling at least 10% of the value of the business (known as an “equity injection,’ like a down payment). This all changed on May 11, 2023, opening opportunities for many more to explore partial business acquisitions with the help of a loan from the SBA.
We’re breaking down the changes below:
Full Buyout Changes
- For those who already own a business, equity injection may not be required by those buying a company in the same region with the same NAICS code of the business they currently own (meaning is has the same classification based on type of economic activity). Example, a plumbing business buying another plumbing business in the same city.
- A seller note which is a loan given by the seller to the buyer (often used to bridge the gap between how much financing a buyer has and the total purchase price) can now be used as equity injection (down payment). A seller note is essentially a hold back of a portion of the business purchase price paid over time to the seller by the buyer with interest.
- Seller notes can be used to satisfy equity injection requirements, and in some cases the buyer may not be required to provide any cash equity injection for the purchase of the business.
- A seller note can qualify as the entire equity injection if the note is on a two-year standby (meaning that the seller will not receive payments for two years, down from a previous ten-year period requirement).
Partial (Less than 100% Buyouts) Changes:
- Partial standby seller notes (interest-only payments being made to the seller) require at least a quarter of the SBA-required equity injection come from a source other than the seller. This means that if using a partial standby note for a portion of equity injection the buyer will need to provide cash (or other eligible sources) for at least 25% of the equity injection required.
- If the business has a debt-to-worth ratio of less than 9:1, there will be no minimum equity injection (down payment) requirement.
- Those selling a partial ownership interest in their business can remain with the business longer than a year and can be a “key employee” for an indefinite amount of time if they retain equity.
- Sellers will not be required to personally guarantee the buyer’s loan unless they retain more than 20% equity.
Bottom line? These new guidelines have drastically changed how much a buyer must put “down” (if anything) to acquire a business – completely or partially – which makes the purchase requirements easier to meet with seller financing or SBA 7(a) loan financing.
Questions? We’re a top three SBA lender in the nation*, and our lenders are well-versed in these changes. If you’re ready to discuss how they may impact your SBA lending opportunities when it comes to partial business acquisitions, we are here to guide you through the process. Call us today at 833.220.2792 to explore your financing options and take advantage of these new guidelines.
*Based on approval count. Ranking based on SBA’s 7(a) and 504 Lender Report. As of 6/26/2023.