Can a minority owner (10%) stay on for more than a year w/ SBA?

by a searcher from University of California, Santa Barbara

2 years ago

Hi All,

Question for the community: I understand that the SBA prohibits ongoing owner involvement in the business after an acquisition is made with a 7(a) loan; owners may remain involved as a consultant, for up to a year. Is there an ownership threshold below which a minority owner may remain involved for a longer or indefinite term? For example, let's say there is a 90% owner/founder who wants to retire, and a 10% owner/employee who wants to remain engaged long term. Is there any way to make that happen?

Thanks in advance!

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intermediary from The University of Chicago - Booth School of Business

I recently looked into this to help a buyer. Even a 1 % owner cannot be involved post-acquisition unless current owner buys out the 1% owner as follows per a person who knows SBA inside-out:
"If the buyout occurs 6 months before the submission of the loan to SBA, then there would be no issue for them to stay."

2 years ago | like reply | 0 likes

searcher from Hillsdale College

You might be able to structure synthetic equity for the 10% owner that converts to real equity on exit after the SBA note is paid. Also may be able to create a "management equity pool" that lets the 10% seller earn back his portion. Lastly, I think he could sell and immediately re-buy as one of your LPs and since he's less than 20% of the ownership. It's not tax efficient for him, but should work.We don't use the SBA for many reasons (and this among them), but I have to believe it's possible if you're creative and everyone is committed to the sale.

2 years ago | like reply | 0 likes

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