We wanted to share some important changes that the SBA has issued and what that means for both Buyers and Sellers. The SBA changed the conditions for a Seller Note to be considered part of the Buyers Equity Injection (aka Down Payment). Under the former guidelines, the seller note must be on Full Standby (no principle or interest payments) until the SBA Loan was paid in full.
Under the new guidelines, if the Seller Note is on Full Standby for 24 months, it can be considered part of the Buyers Equity Injection requirement. It’s important to keep in mind that this increases the leverage of the Total Project Costs and the Buyer and Lenders will likely want to see that the business’s cash flow can support the additional leverage when making purchasing and lending decisions.
SBA has also changed the rules related to purchasing 100% of an operating business. Under the new rules, Buyer will now be able to purchase less than 100% of the business (aka Partial Buy In). What this entails is that it will allow Sellers to stay actively involved in the operation of the business beyond the 12-month consulting period under the former guidelines.
This is a big win for business owners that are looking to transition their business that hold special licensing or intellectual property that wasn’t easily transferred to a Buyer at closing (i.e. HVAC License, Government Contracting certifications, Minority Status certifications etc.). Another additional item for consideration, is that if the Seller of the business is going to remain with the company long term, then their salary and benefits will no longer be considered addbacks when calculating business discretionary cash flow.
For additional information on these changes, click the link below to view more detailed guidelines from the SBA.
For additional questions, you can talk with your lender, or contact a Viking team member to better how this may impact your buying and selling decisions.