The Small Business Administration recently introduced significant changes to its 7(a) loan program, aimed at facilitating business acquisitions and expansions. These modifications bring more flexibility and opportunities for both buyers and sellers. Here are some of the key changes implemented by the SBA, helping businesses to navigate the new rules and take advantage of the updated guidelines.
1. Partial buyouts with enhanced guaranty requirements:
Under the revised rules, the SBA now allows partial buyouts, enabling buyers to acquire a portion of a business while retaining the existing owner(s). However, sellers in such transactions are still subject to the same guarantee requirements as outlined in the current Standard Operating Procedure (SOP). If the current owner intends to retain 20% or more of the business, he or she must provide a personal guarantee (PG).
Additionally, available collateral must be pledged. This arrangement is particularly advantageous for buyers seeking to acquire more than 80% of the business, as the company itself becomes a borrower or co-borrower, while the buyer(s) assume the personal guarantee responsibility.
Furthermore, the remaining owner can retain less than 20% equity and continue working for the business indefinitely. It is important to note that the previous rules regarding 100% buyouts remain unchanged.
2. Equity injection requirements for partial buyouts:
The SBA also hasmodified the equity injection requirements for partial buyouts. Buyers are no longer required to inject equity if the balance sheet of the target company meets certain ratios. This change provides greater flexibility and may alleviate financial burdens for buyers, enabling them to acquire a stake in a business without a significant upfront capital injection.
3. Seller debt flexibility and standby period:
The new ruling acknowledges the use of seller debt to fulfill equity injection requirements in both full and partial buyouts. However, a notable change is that the seller debt can now be placed on a 24-month standby, as opposed to matching the term of the SBA loan. Additionally, if the buying group contributes more than 2.5% of the project costs, the seller debt can count towards equity injection even with interest-only payments. While most lenders may still require some level of buyer contribution, the updated guidelines allow for increased creativity in structuring financing arrangements.
4. Expansion opportunities without equity injection:
In a move to encourage business expansion, the SBA now explicitly states that no equity injection or seller financing is required when acquiring a company with the same NAICS code as the buyer’s existing business in the same region. Although some lenders already offered this option in the past, its formal inclusion in the SBA regulations is expected to prompt more lenders to adopt this approach, widening the opportunities for entrepreneurs looking to expand their operations.
The recent changes to the SBA 7(a) loan program bring about exciting prospects for both buyers and sellers. The introduction of partial buyouts, flexibility in equity injection requirements, and the recognition of seller debt as a viable financing option empower entrepreneurs to pursue business acquisitions and expansions more confidently. As always, it is recommended to consult with your lender and take advantage of professional advice to navigate the intricacies of these new regulations successfully. With these updated guidelines, the SBA aims to foster a thriving small business landscape, encouraging growth and innovation in the entrepreneurial community.
This month's “Did You Know?” tip originally posted on the Calder Capital website.