Can we retain an existing SBA loan on target acquisition for a merger?
September 29, 2023
by an investor from University of Pennsylvania - The Wharton School in Los Angeles, CA, USA
I am looking at a possible merger or common ownership of two companies. Target 1 would be 100% acquired. Target 2 would be partially acquired, whereby the existing owner/CEO would stay on and retain control. Target 2 has an existing SBA loan. Is it possible to retain this loan outstanding (the Target 2 owner/CEO would keep his PG) while we either A) together with the owner/CEO of Target 2 own both businesses under a common parent entity or 2) merge the two targets.
The owner of Target 2 would be the CEO of the two companies going forward and he would retain 50-60% ownership in the combined entities.
Can we keep the SBA loan in this scenario? Also, is there a PG requirement for us as a new investor or could we be disqualified if the source of capital is from a HNW family?
from The University of Chicago in Chicago, IL, USA
A) You want to own a minority interest in T2, Currently, owner (X) owns 100% or a majority
B) want to buy 100% of T1 where owner of T2 will own a majority interest, and
C) want to have a holding company hold your ownership interest in T1 and T2.
My thoughts:
1) I think you can do A w/o involving SBA. Just make sure all investors buying into T2 own less than 20% to avoid PG. You can buy shares from owner (X) or have T2 issues new shares. This will have to be a stock transaction.
2) Do B i.e. acquire T1 as a separate transaction involving the owner (X) of T2 as an individual investor along with you. This can be an Asset or a Stock deal. I am sure SBA permits one individual having controlling interest in more than one entity.
3) For C, it is very common for a family office to have a HoldCo own majority and/or minority interest in multiple portfolio companies. Technically individuals in HoldCo will own interest in T1 and t2 to avoid PG.
from Harvard University in Washington, DC, USA
What’s the SBA loan type, and purpose?
Without detailed analysis…my guess is the all debt needs to be settled at close via a flow of funds. No new senior lender (assuming you’re financing some part of this deal) is going to tolerate an existing note with prior senior rights. It’s just not how this is done.
As attractive as existing fixed rate long term debt might be, you will very likely need to recap that SBA debt at prevailing rates.