The SBA’s Final Rule on Affiliation and Lending Criteria for the SBA Business Loan Programs (88 FR 21074, click here to read) became effective on May 11, 2023. Implementation of the Final Rule is set forth in SBA Procedural Notice, Control No.: 5000-846607 (Click here to read)
Under the Final Rule, SBA Standard 7(a), 7(a) Small, and SBA Express loans proceeds may be used to fund the purchase of a portion of one or more owner’s interest in a business, or of the business itself, subject to the following rules:
- Both the business and the individual owner(s) acquiring the partial ownership interest must be co-borrowers on the subject SBA loan. An SBA-guaranteed loan cannot be made solely to an individual.
- The business may redeem a partial ownership interest from one or more current owners.
- All owners of 20% or more (based on the post-sale percentage ownership interests) are subject to the guaranty requirements set forth in SOP 50 10 6.
- The seller(s) may remain as an owner, officer, director, stockholder, employee or Key Employee of the business.
The Final Rule also sets forth the following minimum borrower equity injection requirements for partial change of ownership transactions:
- The business balance sheets for the most recent completed fiscal year and the current fiscal quarter must reflect a debt-to-worth ratio of no greater than 9:1 prior to the change of ownership.
- If the business balance sheets do not reflect that the business satisfies the debt-to-worth limitation, then the borrower(s) must inject equity, in the form of cash, in the amount of at least 10% of the purchase price, as set forth in the purchase agreement.