SBA 7a loan for Partial Buy-out and Growth Equity

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August 03, 2023

by a professional from University of North Carolina at Chapel Hill in Atlanta, GA, USA

I've been talking with the owner of a very interesting business that was initially looking for growth capital and is now open to selling a portion of the business so long as it comes with growth capital. Assume $2M for acquisition value and $2M for growth capital. Is it possible to do fund both of these (with an equity infusion) under the same SBA loan given the changes that just went into effect? The seller would retain partial ownership (likely 40%).

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Great question. Yes, it should be possible to do a partial business acquisition and also secure working capital. Please keep in mind if the seller is going to continue to own 20% or more of the business they would be required to personally guarantee the loan. Also, if there is a collateral shortfall under the SBA collateral guidelines, the seller could have the same responsibility to pledge outside collateral to help shore up a collateral shortfall as the buyer would.

One hurdle I believe you will have from lenders in underwriting funding for both the purchase and working capital is they will want to understand if the seller is going to put any of the money they are getting back into working capital as well. If the new debt is going to fund everything and the seller gets to take capital off the table, that might not fly with some lenders. They might want that seller to put some money into growth capital as well. Also, large growth capital like $2 million will need to have a defined purpose. The SBA typically will not just fund that much working capital into a deal.

If you would like to discuss further I would be more than happy to connect at any time here or directly at redacted Good luck!
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Reply by a searcher
from Texas A&M University in Johnson City, TN, USA
You'll need to watch global debt service; any other debt payments? If your multiple is reasonable and business is unleveraged, you could potentially do this depending on available business cash flow and assets. But Seller could do the same without you, as they will still have to participate in PG.

Mechanics of how it's done could differ for S vs C corp vs LLC to optimize tax structure for outgoing seller.
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