A breakdown of the new SBA loan rules (Part 2)

The SBA made some major rule changes to SBA 7(a) loans on June 1st.

This email is Part 2 of a short series explaining these changes and the impact they’ll have on business financing strategies.

You can read the previous part here:

• Part 1

What has changed? (Continued from Part 1)

Continuing from where we left off…

There’s one more huge SBA rule change to watch out for.

Multi-step ownership structure changes

If the seller maintains any equity in the deal at all…

They will now have to personally guarantee the buyer’s loan for at least two years.

So in this scenario, all equity holders / investors will be considered co-borrowers on the SBA loan.

Note that this only applies to deals where the seller is maintaining equity. So this would be a partial buyout or a seller rolled equity deal.

This makes these strategies much more complicated, because no investor and very few sellers would be willing to become co-borrowers on your loan.

This is going to change incentives for sellers to keep equity ownership in the business.

Some alternative strategies you can use

Good news is, you still have plenty of other ways to incentivize the seller.

Instead of giving the seller equity in the business, you can:

• Offer a higher purchase price

Say you increase the purchase price by 5% on a $1M deal. That’s an extra $50,000. Over the span of 10 years, that doesn’t add much to your monthly payment, but it’s a big benefit to the seller. So this can still be a great deal for you.

• Do a consulting arrangement

The seller continues working as an employee for the business. This way you get access to their expertise and help with management. And the seller continues to benefit from the growth of the business.

• Use phantom equity structures

The seller gets paid on profit distributions. In the event of a sale, they also get a payout, but don’t have any official ownership.

• Implement earnouts

The seller gets bonus payments if the business hits certain performance metrics in the future.

• Do profit sharing without equity

This lets you sidestep the new restrictions while still incentivizing the seller to help you with the business after the sale.

To be continued in Part 3…

In the final part of this series next week, I’m going to cover:

• What hasn’t changed with SBA loans

• Why the new changes could actually be a good thing

• How all of this will affect first-time business buyers

• Plus, the potential long-term benefits and opportunities

I’ll leave you with this in the meantime:

In my work with Acquisition Ace, I come across a lot of valuable acquisition and investment opportunities.

Any time I find a deal I think is worth sharing with my list, I send out an email broadcast with the details.

If you’d like to receive these broadcasts, just fill out this quick survey:

👉 I want to buy (or invest as a silent partner into) a small business

Or if you want to sell a small business, tell me more about it below:

👉 I want to sell a business (and I’m actively looking for buyers)

Onward,

— Ben Kelly