I wanted to take a moment to update everyone on the important changes that are in the new SBA Standard Operating Procedure ("SOP") that directly impact SBA 7A financing for business acquisitions. I apologize in advance that this post is going to be very long, but I wanted to get all of the information I could out there at this time as I am getting many questions regarding these changes.

Before I get started there are a few things I want to point out.
1) The new SBA SOP does not go into effect until August 1st of###-###-#### Because of this no lender will be able to pull an authorization from the SBA that includes any of the changes until August 1st. My guess is most lenders will not start actively working deals that might fit the SBA criteria until July for this reason and also due to item 2 below.

2) There are likely to be changes to the new SOP. The whole reason the new SOP does not go into effect right away is so that lenders can review, ask questions and provide feedback. So nothing stated below is guaranteed. But if the new SOP were to go into effect today, these are the main changes I think apply to people on Searchfunder.

3) Even though the new SOP allows some things, it does not mean the lenders are going to fully adopt all the provisions of the new SOP. What I mean by this is that many lenders will continue to keep more stringent standards such as requiring more equity in deals, additional seller notes, etc. that are deal specific (much like many do now) to reduce their risk, even though the SBA SOP allows them to be more aggressive. Because of this it is important to understand individual lenders policies as it relates to SBA lending.

Now for the major changes I think impact business acquisitions:

1) You can now do partial buy-outs of businesses and sellers can stay in the business indefinitely. However, one key feature of these partial buyouts is that the buyer must be buying the stock or membership in the existing company. They can buy that interest in a company they own and include investors, but ultimately the selling company will stay in place and be the primary borrower. So you cannot do an asset purchase under the partial buy-outs or do a true "equity-roll" where the seller sells 100% of the interest of the company to a new company and then becomes a partner in the new company. Instead the seller keeps a percentage of the existing equity and the buyer acquires whatever percentage of the equity they are looking to acquire. There is no minimum stated in the SBA SOP of the percentage of the company someone must buy, but I think most lenders will want the loan to be $350,000 or higher to be worth the paperwork.

2) On a partial buy-out, anyone who has a 20% or greater ownership interest in the selling company post closing will be required to sign a personal guarantee. This includes any seller if their individual ownership is 20% or greater. In addition, if the loan is not fully secured by business assets, then all guarantors, including the seller(s), would be required to pledge equity in personal assets to shore up the collateral position if they have any such assets. If you are a buyer, it is going to be important for you to discuss this issue with sellers up front, as I doubt many sellers are going to want to sell 60 to 80% of their business and still have to guarantee the loan. Please note if the seller retains less than 20% of the business post closing, they will not be required by the SBA to personally guarantee the loan, which also means they will not be required to pledge outside assets to back the loan as that is only a requirement for guarantors with a 20% or greater ownership interest. Although it may not be required by the SBA, it is always possible a lender might still want the seller to guarantee the loan or sign a partial guarantee even though they will own less than 20% of the business if they are seen as a key employee by the lender (maybe the buyer has no industry experience) or the seller controls a license vital to the operations of the business going forward. But if they own less than 20% of the company and are required by the lender to sign a full or partial guarantee on the loan, they would not be required to pledge outside collateral on the loan according to the SBA rules.

3) There is no equity required by the SBA on partial buy-outs if the balance sheet of the seller is at a 9 to 1 debt to worth ratio in the year-end and quarter-end prior to closing. However, this does not mean lenders will not require equity down even if these ratios are met. If those ratios are not met, the equity to be required down by the SBA is 10% and is based on the percentage of the business being acquired. So if someone is buying a 70% stake in a business valued at $1 million, the required equity injection would be 10% of $700,000 or $70,000.

4) If you are buying out other owners in a company where you are already an owner, you have to have been an owner for the last 24 months. No equity is required if the balance sheet meets a 9 to 1 debt to worth ratio in the year-end and quarter-end prior to closing. If that condition is not met then an equity injection of 10% is required by the SBA on the buy-out.

5) If you operate a company now and are buying another company that is in the same NACIS code as your existing business, you can finance 100% of the business purchase via an SBA 7A loan. Some lenders were doing this prior to the new SOP, but the new SOP makes this a standard rule.

6) Seller debt can now be used as equity in both full and partial business acquisitions based on the new SBA rules if the seller note is on full standby for at least 24-months. This technically means you could finance 100% of the business acquisition via the SBA loan and a seller note on standby for only 24-months and not bring any cash equity to the table.. The use of seller notes for equity used to require the note to be on full standby for the life of the SBA loan, so this is a big change. The old SBA SOP also only allowed seller notes to count for 5% of the previously required 10% equity of the purchase price with the buyer still required to bring at least 5% equity to the table. In addition, under the new rules so long as the buyer is putting down at least 2.5% of the acquisition price, the SBA allows seller notes to have interest only payments for the first 24-months and still count as equity. Although you can now get away with no money down with a seller note on full standby for 24-month or with only 2.5% down with the seller not having interest only payments from day 1, this is one option I do not think many lenders will provide. Prior to this change, the SBA allowed 5% down with a 5% seller note on fully standby. Many lenders would not use the 5% / 5% option and those that did only usually used it for very strong deals. However, less to no money down will now be an option available for more aggressive lenders or very strong deals (like when a key employee is buying the company from the owners). Also keep in mind, when calculating cash flow the lender will need to count the seller note payments (even though they do not start for 24 months) in the cash flow analysis, so if there is not sufficient cash flow to support the seller note, having the seller note in repayment likely will not be an option. You may still see lenders require seller notes on fully standby for a longer period of time or more equity required down to make the cash flow work.

7) For underwriting partial buy-outs, seller salary can only be added back if the seller is no longer going to have a permanent role in the company (beyond a one-year transition). If the seller is staying active, the seller can provide notice they are taking a reduced salary as part of the purchase to add-back any difference in salary. But this is something that will need to be figured out with each individual transaction.

8) The definition of "Affiliate Businesses" for SBA purposes has changed. This does not reduce related SBA exposure you have on any other transactions you have guaranteed, but now if you have less than a 50% ownership in other businesses the lender is no longer required by the SBA to get the financial statements on those entities and include them in the SBA underwriting. It still does not mean some Banks will not request this information to complete their own global cash flow, but the SBA no longer requires it.

9) The franchise directory has gone away so Banks can make their own determinations as to what franchises they will lend to. Before all franchise loans could only be made to approved SBA franchises. It has yet to be seen what additional documentation the SBA may require from franchisors as part of the closing process.

10) The Small Loan Advantage program has been permanently increased to $500,000 from $350,000, making it easier to qualify for smaller balance loans.

11) As always, the SBA loan cannot exceed the business valuation for the company you are buying or the percentage of the company you are buying. So if you are buying 70% of a business for $700,000, the whole business must appraise for at least $1 million so your portion of the business is valued at $700,000. If the business does not value out, then you may be required to bring additional equity to the table, reduce the purchase price, have the seller carry back the difference in a seller note on full standby, or do a combination of these items.

I hope you find this information of help. If any additional changes are made or if I find out that any interpretations contained in this post that are incorrect, I will get updates out. If you have additional questions or would like to discuss any commercial business or real estate financing needs, including business acquisitions via conventional or SBA financing, please do not hesitate to ping me here or directly at --@----.com Good luck with your search!