In a previous article (click here to read), we outlined the U.S. Small Business Administration’s (“SBA’”) recent guidance allowing “multi-step partial changes of ownership” transactions as described in SBA Procedural Notice, Control No.: 5000-862692, Effective December 6, 2024 (click here to read).
There has been some confusion as to whether a “multi-step partial change of ownership” transaction may be structured as an asset purchase. The following rule set forth in the Procedural Notice has caused some lenders to interpret that “multi-step partial changes of ownership” transactions must be structured as stock purchases:
Both the Operating Company and the new owner(s) that did not previously have an ownership interest in the business must be Co-Borrowers on the SBA 7(a) loan.
While the Co-Borrower requirement is consistent with the long-standing SOP requirement that an acquiring party and the small business must be co-borrowers in stock purchase transactions resulting in either a “complete change of ownership” or a “complete partner buyout”, our office recently confirmed with SBA that a “multi-step partial change of ownership” transaction may be structured as an asset purchase.
The following is an example of how such an asset purchase could be structured:
- John currently owns 100% of ABC, LLC.
- John’s friend, Jane wishes to buy into the business, but would like John to remain as an owner.
- John’s accountant has advised that it would be advantageous for John and Jane to form a new entity, XYZ, Inc., to purchase all of the assets of ABC, LLC.
- Jane will own 81% of the stock of XYZ, Inc., and John will own 19%
The structure of the hypothetical transaction is allowable pursuant to the Procedural Notice with XYZ, Inc. and Jane as Co-Borrowers. Since John will own 19%, he will not be required to personally guaranty the loan.
As a reminder, lenders are allowed to process SBA 7(a) loans to fund “multi-step partial changes of ownership” with delegated authority, however, due to the complex nature of these transactions, it may be advisable for such loan applications to be submitted for general processing by the Loan Guaranty Processing Centers.