BEST PRACTICES: CHANGE IN OWNERSHIP
By Janet M. Dery, Esq.
 |
| Janet M. Dery, Esq. |
A lender may use an U.S. Small Business Administration ("SBA") guaranteed loan to finance a change in ownership of a business in two situations only: (1) when a third party is purchasing 100% of the ownership interest in a business, either through an asset or a stock purchase ("Outsider Purchase"); or (2) when one or more existing owners are purchasing the stock of a selling owner(s) resulting in 100% ownership by remaining owners ("Insider Purchase"). In considering whether a change of ownership is eligible, an additional analysis must be made to determine whether the change will benefit the business being purchased. If the analysis does not support that the change in ownership will be in the best interest of the business, then it is not an eligible loan.
For stock purchases, if the change of ownership will be accomplished through an Outsider Purchase, the proper borrower for the loan is the company whose stock is being purchased. The SBA is now silent on whether the third party purchaser of the stock must be a co-borrower or can just be a guarantor, so lender's credit policy should dictate the applicable role. As for documenting the change of ownership, there must be a purchase agreement between the third party purchaser and the selling owners. If the stock purchase change of ownership will be an Insider Purchase, then the sole borrower must be the company whose stock is being acquired. The purchase agreement should be a stock redemption agreement, whereby the company (borrower) agrees to redeem (purchase) the selling shareholder's outstanding stock in the company. Contrast the redemption agreement with a more traditional stock purchase agreement which typically would be between the individual selling and buying shareholders. Please note that this is a change in the SBA's policy with the release of the SOP 50 10 5(C).
When there is commercial real estate as part of the change of ownership, it cannot be financed separately by a non-SBA guaranteed loan unless: (1) the SBA guaranteed loan receives a shared ("pari-passu") lien position on the commercial real estate; or (2) the separate real estate financing is part of a 504 loan project.
If intangible assets are being financed with the change of ownership, an equity injection in the amount of 25% of the entire purchase price (even if such purchase price includes commercial real estate) will be required if the intangible assets have a value of $500,000 or more. The valuation of the intangible assets is determined bythe value of the business as identified in a business valuation minus the sum of the working capital assets and the fixed assets being purchased. This 25% injection requirement can be met solely by the borrower or in combination with seller take-back financing that is on full standby (no principal or interest payments) for a minimum of 2 years. If this equity injection requirement can be met, then the loan can be processed under a lender's delegated authority. If this requirement cannot be met, the loan must be submitted to the SBA for general processing and approval.
When there is any business debt that is to be refinanced with loan proceeds in connection with a change in ownership, the lender must make sure to perform the proper analysis on whether the debt refinancing is eligible. If the loan is for an Outsider Purchase, then the pay off of the existing business debt is considered part of the purchase of the business and does not have to meet the SBA's debt refinancing policies. If the loan is for an Insider Purchase, all of the business debt to be refinanced as part of the purchase must meet all of the SBA's debt refinancing policies as currently contained on pages 142-146 of SOP 50 10 5(C).
Lenders must be sure to follow the guidelines set forth by the SBA for change in ownership transactions in order to protect the SBA guaranty and properly document the loan. Because these guidelines deal with eligibility issues, lenders that fail to adhere to the requirements risk a complete denial of the SBA guaranty. For more information on this and other SBA related topics, contact Janet Dery at jdery@starfieldsmith.com or 215-542-7070.
Back to Top
