Transition Services Agreement in SBA Funded Deals

by a searcher from Northwestern University

May 16,2023

Question for you successful searchers out there that funded their deal(s) with the SBA 7a program:

How did you structure the transition period? Assuming the sellers were employees and officers of the target, did they resign at closing and became 1099 contractors? Did they receive 'regular' pay, or did you compensate them per hour worked? How did you deal with insurance and benefits for the transition period? 

Any examples and data points are much appreciated! DMs are open too

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lender from Eastern Illinois University

If using an SBA loan and doing a full acquisition under the current rules the maximum agreement you can give the seller as part of the purchase contract is a one-year employment agreement. Whatever you agree to pay them for that first year does not count against debt service when underwriting the loan because it is seen as a one-time expense. The rule in the SBA Standard Operating Procedure just states you cannot contract with the seller for more than 12 months, but it does not state you cannot continue to employ them after the 12 months. Once you own the business you are in control and if the seller's continued involvement provides value and helps you to be successful beyond one year, then it makes sense for you to continue to either employ them or contract with them.

05/18/2023 | like reply | 1 like

admin from Massachusetts Institute of Technology - MIT Sloan School of Management

^Searchfunder member‌, ^Searchfunder member‌, ^Searchfunder member‌, ^Searchfunder member‌, ^Searchfunder member‌, & ^Searchfunder member‌ have commented on Transition Service Agreements and might be able to share some insights with you here. Thanks in advance!

05/16/2023 | like reply | 1 like

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