Yes, you can sell a business with an SBA loan, but not without taking certain important measures. The most crucial measure is obtaining lender approval. With your bank’s approval, there are three scenarios for selling a business with an SBA loan.
Sell for more than you owe.
If your business is valued for more than you owe on the loan with the bank, you can sell your business and use the proceeds to pay off the loan in full. Straightforward as this may be, do not proceed without first getting your bank’s approval. Think back to the stack of papers you signed when you first obtained your SBA loan. Most likely, one of those papers was a security agreement in which the bank took a security interest in all the business assets. That means the assets of your business are the bank’s collateral on the loan. It is best to keep your lender apprised of all developments regarding the sale, even when it will result in a payout sufficient to pay off your loan.
Sell for less than you owe.
Perhaps you need or want to sell your business, but the business is valued at an amount less than the balance on your SBA loan. This is called a short sale. In this case it is even more imperative that you obtain your lender’s permission before proceeding with a sale. As mentioned above, the assets of your business are the bank’s collateral on the loan. To sell the business without first obtaining the bank’s permission could be viewed as a fraudulent transfer of assets, and this will result in a great deal of trouble for you and for the buyer. With the sale approved, you will be required to submit 100% of the proceeds to pay down the loan. Then, for the remaining balance, you will either resolve it with other personal resources or, if you do not have resources to prevent defaulting on the balance, you may attempt to work with the SBA to negotiate a settlement (called an “Offer in Compromise”).
Buyer assumes the loan.
Another option to sell a business with an SBA loan is for the buyer to assume the loan. SBA loans are fully assumable with SBA approval. Getting this approval, however, can be very complex. Any borrower attempting to assume an SBA loan will be carefully examined by the SBA and must meet a lengthy list of requirements. Some of these include:
- being an SBA-approved borrower under the most recent SBA guidelines,
- having sufficient financial strength to fully repay the loan,
- being the primary owner of the business,
- having equal or better business experience or skills than the current borrower,
- the loan assumption not having a negative financial impact on the business.
Bottom line: a buyer assuming the SBA loan of a seller is the equivalent of applying for the loan all over again. (So, if you are considering a loan assumption because your buyer is having trouble securing their own financing, this is not a realistic option.)
We have answered the question, “Can I sell my business if I have an SBA loan?”. The answer is yes. But the next question you need to answer is, “How much is my business worth?” Obtaining an accurate business valuation will be critical in deciding how to proceed, and the input of a professional advisor will also prove beneficial, especially during what is certainly a stressful time for you as a business owner. For a no-cost, confidential business valuation, contact us today.