Sba no longer allowing distributions to investors while loan outstanding
July 05, 2021
by an investor from Baylor University in Aledo, TX 76008, USA
Please let me know how anyone is handling this new sba requirement.
This would appear to be a game changer for the search fund world.
I am working on a deal and this change will likely cause my investors to have a change of heart if no current pay.
thanks
from IE Business School in Seattle, WA, USA
My understanding is there was no official policy guidance issued, but at a recent SBA industry conference (NAGGL in April###-###-#### the SBA surprised everyone by claiming they were skeptical of "preferred equity". I.e. all of a sudden they decided to that preferred shareholders are more like debt than equity. (I'm sure many of us would say this is absolute B.S., but as someone mentioned above the SBA is the SBA & they can basically do whatever they want).
In practical terms this means you can still have preferred investors, but your bank might not be able to count those investors as part of the 10% "equity" down payment requirement. If you have enough common equity to meet the 10%, or if all investors are common & there aren't any side agreements mandating investor payout amounts or frequency during the loan, then you'd be fine. To make matters fuzzier, because there's no guidance each bank is left to interpret this for themselves. If your banker went to this conference (like mine did), s/he is probably scared shitless & taking a very conservative stance. If you happen to find a banker that didn't go to the conference or has a little more risk appetite, they might be lending the same as before this conference.
Keep in mind that SBA loans are covenant-light so as long as you meet the DSCR requirements & make all of your payments on time, the SBA has no real mechanism to prevent you from making distributions. The loan documents state you can't make distributions that would "jeopardize the health of the company" (I'm paraphrasing), but if you continually meet the DSCR test & make your loan payments on time then I think you'd be on fairly safe ground arguing your dividend payments aren't jeopardizing the company. But convincing investors to take common equity instead of preferred & then simply "trust you" to make dividend payments voluntarily is going to be a tough sell (good luck!).
I had to deal with this bombshell late in the process on the acquisition I just closed on June 1, & it definitely almost killed my deal. Feel free to DM me or send an email to redacted if you want to chat. I'll caveat this post by saying none of this is legal, accounting, investing, financing, or securities advice, & you should really consult experts in each of those areas :).
from University of Missouri in St. Louis, MO, USA