New SBA Rules Could Derail Your Acquisition

In the world of business acquisitions, understanding the nuances of financing can be the difference between success and failure. Recent updates to the Small Business Administration (SBA) rules have introduced significant changes that could impact your acquisition strategy. In this article, we will break down the critical updates to SBA acquisition financing, particularly focusing on the elimination of partial seller standby notes, mandatory personal guarantees for sellers, and stricter equity injection rules. Whether you are currently mid-deal or just starting to explore a business acquisition, this information is essential to avoid delays, restructures, or blown-up transactions.

Understanding the Changes: What’s New with SBA

Financing?

On June 1st, a new Standard Operating Procedure (SOP 50108) will come into effect, bringing with it a host of changes that will affect how business acquisitions are financed. Here’s a comprehensive overview of what’s changing:

1. Elimination of Partial Seller Standby Notes

One of the most significant changes is the elimination of partial seller standby notes from being counted towards the buyer's equity injection. Previously, sellers could carry back a portion of the down payment, allowing for more flexible financing arrangements. Now, at least 50% of the equity injection must come directly from the buyer. This change means that the financing landscape is shifting, making it crucial for buyers to secure more upfront capital.

2. Mandatory Personal Guarantees for Seller Equity Retention

If a seller retains equity post-sale, even if it’s below 20%, they are now required to personally guarantee the full SBA loan for two years. This change is likely to deter sellers from retaining ownership, as they generally prefer to step away without further obligations. The requirement for personal guarantees could complicate negotiations, as sellers may be reluctant to agree to terms that leave them financially tied to the business after selling.

3. Stricter Equity Injection Requirements

Under the new rules, there will also be a strict 10% equity injection requirement for all complete changes of ownership. This means that buyers must come to the table with more skin in the game, which could be a barrier for some prospective buyers. Additionally, multi-step partial buyouts have been rendered ineligible, meaning buyers can no longer purchase a portion of the company and then return for additional stakes later.

4. Seller Notes and Standby Requirements

In terms of seller notes, they will only be allowed as equity if they are on full standby for the life of the loan, which is typically 10 years for business acquisitions. Previously, seller notes only needed to be on standby for two years. This change could significantly limit the flexibility of deal structures, making it more challenging for buyers to negotiate favorable terms.

5. Restrictions on Investors

Another notable change is the restriction on foreign investors. Previously, investors who were not U.S. citizens or permanent residents could participate in deals. This has now been altered, and only U.S. citizens or permanent residents can be investors in SBA-backed deals. This change could wipe out many deals that previously included foreign investment, which may lead to significant restructuring in the industry.

6. Elimination of the Personal Resource Test

On a positive note, high-net-worth borrowers may find relief as the personal resource test has been eliminated. This change could make it easier for some buyers to qualify for loans, but it must be noted that this is offset by the stricter requirements in other areas.

What Should Buyers and Sellers Do Now?

Given the urgency of these changes, it is imperative for buyers and sellers to act swiftly. If you have a deal that falls under any of these categories, it’s crucial to secure your case file number before June 1st. If you fail to do so, your deal may revert to these new guidelines, which could derail your acquisition plans.

Here are some steps to consider:

• Contact your lender to discuss how these changes might impact your current or future deals.
• Consider restructuring your deal to accommodate the new requirements.
• Explore alternative financing options if necessary.
• Stay informed about the latest developments in SBA financing to avoid surprises.
• Reach out to experts who can provide guidance tailored to your specific situation.

Conclusion

The new SBA rules come with both challenges and opportunities. While they may complicate the acquisition process for some, understanding these changes is key to navigating the financing landscape effectively. As we move into a potentially turbulent economic period, staying proactive and informed will be essential for both buyers and sellers looking to close deals successfully. For those looking to expand their business, consider utilizing virtual team members and AI to streamline operations and maximize production. For more insights and resources, feel free to reach out or check out our free ebook designed to help you grow your business.