The U.S. Small Business Administration (SBA) published its latest rule on April 10, 2023, amending various regulations governing the SBA’s 7(a) loan program. These changes will almost certainly have important implications for business owners and acquirers. The new regulations allow for additional flexibility in the structure of M&A deals using SBA financing, which in turn will provide greater opportunities for buyers and benefits to sellers.
SBA 7(a) loans are among the most popular small business loans in the U.S. and are often used by entrepreneurs to acquire businesses. These loans often have a variety of advantages over other types of financing, including lower down payments, longer repayment terms, lower interest rates, and more flexibility to use loan proceeds. Until recently, however, SBA loans could not be used in conjunction with other popular types of M&A deal features, such as seller equity rollovers.
Current regulations restrict borrowers from using 7(a) loan proceeds to purchase a portion of a business or a portion of another owner’s interest—the loan must be used to buy the entirety of the business. Fortunately, the SBA has revised its lending criteria to allow borrowers to use 7(a) loan proceeds to fund partial changes of ownership. These changes will permit buyers of businesses to utilize an SBA 7(a) loan in conjunction with a seller equity rollover to conduct an acquisition.
A seller equity rollover refers to a situation where the current owners of a business agree to retain a portion of their equity stake in the company being sold. This allows the purchaser to reduce the amount of cash necessary to conduct the acquisition, while also allowing the seller to benefit from the potential growth and future profitability of the company under new ownership. Seller equity rollovers may provide distinct advantages over other types of deal structures, such as aligning interests, improving valuations, and certain tax benefits.
The revised rule offers a win-win situation for both buyers and sellers of companies and will enable more creative deal structures when SBA financing is being used to fund an acquisition.
Contact one of our M&A attorneys before your next acquisition to discuss whether you can benefit from these recent rule changes.
This rule goes into effect on May 11, 2023