Any info on equity rollover with SBA 7a? - Searchfunder

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by a searcher from Northwestern University - Kellogg School of Management
in Chicago, IL, USA

1yr ago

Any info on equity rollover with SBA 7a?

I've heard that the SBA 7a loans allow for the owner to retain some equity post-close, by structuring it like a partner buy-out under the new rules. Does anyone have any experience with that?

If, for example, I were to use a $5M SBA 7a loan to buy 81% of the equity in a target...
-- Would the dscr analysis be done on the full EBITDA during underwriting, or just my 81% share?

Similarly, if I were to use a $5M SBA 7a loan to buy 79% of the equity in a target...
-- Would the prior owner have to provide a PG on the loan?

Are there any other considerations, from either a personal risk or a lender underwriting perspective that I should be thinking about?

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reply by a lender 1yr ago
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Great questions. I will attempt to answer them here.

Regardless of what percentage of the business you buy, the existing company will be the borrower on the loan and fully responsible for the loan. Because of that the Bank will utilize 100% of the EBITDA of the company in calculating debt service. If the seller is no longer taking a salary post-acquisition or there are other seller benefits that will be going away, those can be added back to cash flow as well.

Now your equity requirement will only be based on the percentage of the business you are buying. So if you value the business at $5 million and the seller is retaining 19%, then you are paying $4.05 million for 81% of the business. Your required equity would be based on a percentage of $4.05 million.

If you were to buy 79% of the equity in the company and one seller owns 21% or more (or husband & wife as their ownership is viewed on a combined household basis), then that person(s) would be required to sign a personal guarantee on the loan. So you want to keep each remaining owner below a 20% ownership interest to avoid the personal guarantee from the seller.

Although it sounds like you already know this, but when doing a partial business acquisition it has to be done as a stock or membership interest purchase. So the existing company is the Borrower,. You cannot do an asset purchase with a partial business acquisition under the SBA rules.

If you have any additional questions or need assistance analyzing any opportunities or with financing, please do not hesitate to reach out to me here or at redacted Good luck with your search.

reply by a professional 1yr ago
from Florida Agricultural and Mechanical University in Orlando, FL, USA

An update here on your Seller PG question: the new SBA SOP updates to take effect June 1, 2025 will require the Seller to personally guarantee the full loan amount for at least two years, regardless of how much ownership they retain.

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