Just a year ago you were not able to consider any transaction that was leaving the current owner with any level of ownership interest post-closing.  Well, we all know that’s a huge change that affects many transactions and that’s only one of the major changes issued by the SBA through the end of 2023. This single rule has not been altered since SBA’s inception in 1953 and is a major change that many lenders are beginning to interpret and utilize in 2024.

The new “Partial Ownership” change does come with a few nuances that need to be addressed, but overall, we can make it work. The first requirement is that this must be structured as a seller’s redemption of stock back to the corporation. It must be a stock sale as the funds will be directed to the current corporation, which will allow the corporation to buy shares back from the current shareholder (seller). While structuring a transaction under this new rule, you must consider the “post-closing” ownership levels of all owners understanding that anyone owning 20% or more will be required to fully guarantee. If your seller does not want to personally guarantee the loan, or pledge their available collateral, then be sure they retain less than 20% of the company’s stock. Our usage of this rule typically leaves the seller with between 1% and 15% as an average. Understanding that the actual percentage (being under 20%) is irrelevant to SBA, any level of retained shares automatically allows the seller to remain as an officer, director, stockholder, key employee or employee of the business with no exiting requirements. We’ve used this for many acquisitions requiring licenses such as electrical contracting, plumbing, painting, HVAC and others. We’ve structured transactions to include an automatic partner buyout at some future date when leaving the current owner in place (allowing the seller to fully exit).

Another change you should be aware of that has affected a good majority of our loan submissions is the reduced down payment through seller financing options. Previously, the SBA required any seller note that contributed toward the equity injection (down payment) to be on full stand-by for the life of the loan with no ability to receive any principal or interest payments for 10 years or longer. Today that has greatly changed, and the seller is now allowed interest payments to begin immediately after the closing provided the buyer injects a minimum of 2.5% into the project. This rule change allows the seller to hold the entire 10% required down payment but, to be honest, we have not found a lender willing to accept these terms and have the borrower inject zero into the project. What we have received approvals on is 2.5% injection and 5% injection scenarios. Both required stronger direct industry experience. This rule also states that any seller notes contributing toward injection cannot have any balloon payment.

The final change I’ll discuss today affects our larger transactions.

Below is the new affiliation rule change that now excludes any borrower’s affiliate business if the borrower holds less than a 51% ownership level. Previously, any affiliate business an applicant owned 20% or more of must have been historically reviewed and included when determining SBA loan eligibility maximums.

The current interpretation of the above rule change (and confirmed in writing by SBA) is that any financing associated with the affiliate business the applicant owns less than 50% of, is no longer to be considered when calculating SBA eligibility. By default, this now allows an applicant to secure an additional $5MM loan for use on an “unaffiliated business” purchase. The applicant must own less than 50% of his affiliate and the NAICS code of the new target must confirm a different industry. This rule does not limit a buyer to only one additional $5MM loan, but if they continue to own under 50% of multiple businesses, then Yes, each one can have a $5MM SBA exposure.

Here’s the bottom line on these, and all the other changes in the SBA program that have happened since August of last year, be sure you’re working with a financing source that’s aware and willing to utilize a combination of each to secure your transactions approval. Be sure you’re considering the correct combination of all the changes/options to ensure you’re providing the best creative option for your deals.

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You can reach out directly to me at Stevem@easysba.com or my direct dial at 919.376.2922.

I hope today’s letter was informative and please feel free to share with anyone that you believe can benefit from it. We are dedicated to the success of the intermediary.

Steve Mariani

Owner, Diamond Financial Services

(888) 238-0952