SBA and Seller's Contractors Licenses

January 06, 2024

by a searcher from University of Virginia in Phoenix, AZ, USA

I am looking at construction companies in Arizona, which has a strict 4 year time requirement for many of the specific contractors licenses. The licenses are held by the entity with the requirement that there be a qualified person on the license. When the seller is the qualified person and the buyer cannot yet qualify, the options are to (1) partner with someone who could qualify for the license, (2) ask a current employee become the qualified person, or (3) ask the seller to stay connected as the qualified person. I have been told that the SBA does not like the flight risk created by having someone who is not the owner as the qualified person. Is this true and, if so, what might be sufficient to mitigate this? Would a seller note work? Keeping the seller as a 5-10% owner, etc.

0 Likes

3 Replies

95 Views

Replies

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I agree with Asumahu. We are a Commercial Loan Brokerage shop with over 500 funding partners and over 60 funding partners on the SBA side. If the seller is playing some sort of vital role post closing, even if they own less than 20% of the company, we are often times seeing the lender require them to guarantee the loan. In some cases it might be a full guarantee and in other cases it might be a limited guarantee. Although we have yet to do a deal this way, we did have another similar situation where a lender told us they would be willing to do a limited guarantee that they would release once the license transferred. The buyer did not move forward, but I think that would be a possibility based on that discussion to do a guarantee that would burn off once you get control of the license (again, so long as the seller owns less than 20% of the business post close). If they own 20% or more they are required to guarantee the whole loan anyway.

Outside of having the seller stay on, I do not think a seller note is going to be sufficient. The only other way to do it would be to buy it with a partner (whether an existing employee or outside employee) that can hold that license. Please let me know if you have any additional questions or would like to discuss options further. You can reach me here or directly at redacted Have a great day!

Reply by a lender
from Montclair State University in Odenton, MD, USA

It’s true that the SBA doesn’t like when the license holder is not an owner. SBA lenders will differ on whether they are comfortable with the seller having a minority share and being a license holder. My bank’s stance is that we would want the seller to guarantee the loan even though he or she will have less than 20% ownership. Since the seller is the license holder and it can take up to four years to get the license, I think most lenders will have trouble with this.

+1 more reply.

Join the discussion