Last week we examined the SBA SOP 50 57 4 Offer in Compromise (OIC) process for closed businesses, the most common scenario in which an OIC arises, once a business has ceased operations and the lender’s collateral has been liquidated. This newsletter summarizes the SOP 50 57 4 requirements for the less common, and more scrutinized, scenario of an OIC with a borrower whose business is still in operations, referred to as a “going concern business”.
An OIC with a going concern business is appropriate only when the viability of the business is at stake and acceptance of the offer will not harm the integrity of the 7(a) Loan Program. Lenders must not use the Offer in Compromise process as a means to write down the debt of a business that is merely experiencing temporary cash flow problems.
An OIC for a going concern business must satisfy the general requirements that apply to all OICs pursuant to SOP 50 57 4. In addition, SOP 50 57 4 imposes the following requirements specific to a going concern business. Before submitting an OIC from a going concern business, lenders should confirm that:
- The compromise must be necessary to avoid closure of the business, i.e., the business must not be able to continue operating under its current debt structure and the lender must have exhausted all other options to allow the business to remain viable including the sale of non-essential assets and the closure of non-profitable business segments or locations;
- The lender must show that the Borrower passes the feasibility test for a successful workout set forth in Chapter 17 of SOP 50 57 4.
- The borrower and lender must show that the compromise is part of an overall debt restructuring plan that involves all the borrower’s creditors. A detailed list of creditors, current balances, and contact information is required.
- The lender must provide specific details regarding all the borrower’s secured and unsecured debt and the borrower must provide the debt reduction arrangements it has made with each of its other creditors, in a written agreement signed by all the borrower’s creditors; and
- The borrower’s proposed treatment of the SBA 7(a) loan must be fair and equitable in comparison to the treatment to be received by the borrower’s other creditors, including the percentage of debt to be forgiven, whether collateral is provided or retained if the compromise amount is to be paid in installments, and whether other lenders are allowed to participate in an asset appreciation sharing agreement. The lender must show why the going concern compromise will maximize recovery.
In addition to the compromise offer and supporting documents required by SOP 50 57 4 for all OICs, when the borrower is a going concern business, the obligor(s) submitting the OIC must also provide:
- Financial Statements. A current financial statement, signed under penalty of perjury, showing the obligor’s assets, liabilities, income and expenses, e.g., SBA Form 770 (Financial Statement of Debtor), plus the most recent year-end financial statements for the business.
- Business Federal Income Tax Returns. Complete copies of the federal income tax returns for the business and any affiliates filed with the IRS for the most recent two years, or a written explanation as to why a copy is not available, together with an executed IRS Form 4506-C or Form 8821.
An Offer in Compromise with a going concern business follows a narrow path with specific requirements. It is intended to be utilized only in scenarios in which the business’s survival genuinely depends on it, where the lender has already pursued every reasonable alternative to keep the business operationally viable, and where the SBA loan’s share of any restructuring is fair, equitable, and structured to maximize recovery. As such, a well-documented restructuring plan, complete creditor participation, and the required financial records remain the foundation of a viable going concern business’s Offer in Compromise request.
If your lending institution has questions about SBA Offers in Compromise for going concern businesses, or any other SBA lending matters, please contact us at SBAQuestions@JellumLaw.com.