SBA Rule Change with Important Implications!

Currently, the SBA rules require a business buyer to acquire 100% of a target business when acquiring an SMB using SBA 7(a) financing.

But, changes are coming!

The SBA has revised this rule to allow borrowers to use 7(a) loan proceeds to fund partial changes of ownership (in addition to full changes of ownership).

Once effective in May 2023, the revised rule will allow a borrower to purchase a portion of the business or a portion of an owner’s interest in a business, or to purchase the entire business or an owner’s entire interest.

This means that, among other things, “equity rollovers” (i.e., where the seller retains a portion of the target company after an acquisition) will now be permitted.

Equity rollovers are an important tool often used in private equity deals that allow the seller to have major “skin in the game.”

Currently, the best assertion of the seller’s belief in the go-forward viability of the target business is a promissory note, whereby debt repayment is affected by the businesses success or failure post-closing. That is, a debt-based interest in the success of the business.

Now, buyers have a powerful new tool to ask the seller to demonstrate their belief in the quality of the business. An equity-based interest, the value of which is predicated in the go-forward success of the business!

The Final Rule was published on 4/10/23 and will become effective on 5/11/23.

There will be plenty of discussions and clarifications coming in due course, but one thing is certain — these changes will dramatically benefit SMBs and searchers who are interested in obtaining an SBA loan.