SBA Tip # 3
Seller must be gone within 12 months
By Stephen Mariani
This rule comes up many times during the acquisition process and MUST be addressed prior to the loan submission to any lender. The actual rule states:
The seller may not remain as an officer, director, stockholder or key employee of the business. (If a short transitional period is needed, the small business may contract with the seller as a consultant for a period not to exceed 12 months including any extensions.)
With the above rule in mind, the other items that are important to consider, understand and address are that anyone owning any amount of stock in the selling company will be considered “Owners” in the eyes of the SBA and will need to go.
Why you need to know this
So how do you address this if your buyer wants a manger with a 1% stock position to remain with the company? The SBA can only control the buyer and their side of the transaction, not the sellers. If that same manager relinquished his or her shares of stock prior to the actual transaction date then they would not be considered an owner and can be utilized as an employee moving forward with your new buyer. What to avoid from the very beginning is allowing the offer to purchase or LOI being executed by the buyer and seller to include verbiage directly conflicting with the above rule. We see the seller’s consulting contract included in an offer and for longer than the 12 month maximum all the time. You must address this right up front and be sure that both sides understand and comply with the above rule.
Being pro-active from the beginning and not allowing anything in that offer that directly contradicts this rule will help you get past the initial lender decline and get them to look more seriously at your transaction.