In recent years, many questions have arisen regarding how to structure a change of ownership transaction involving the purchase of stock so that it is eligible for SBA financing. SOP 50 10 5(E) (the "SOP"), which became effective on June 1, 2012, answered some of these questions. The SOP clarified that the loan applicant must be a business. Lenders can not extend a loan to an individual to purchase stock, even if both the individual and the business are co-borrowers.

If the change of ownership is between existing individual owners, this is fairly straightforward. The business must be the borrower and the business will use loan proceeds to purchase the stock from the departing owners through a traditional stock redemption. At the conclusion of the transaction, the remaining stockholders will own 100% of the outstanding stock of the business.

If the change of ownership involves an "outside" individual who wants to purchase all of the stock of an entity, the business, which is the borrower, will still use loan proceeds to purchase the stock of all current owners through a stock redemption. But the individual(s) who will be the new owners will need to use their own money to purchase stock from the company. This can occur simultaneously with the stock redemption or it can occur in a separate transaction. The SOP clarifies that the amount paid for the stock is determined by the business and new owners and that the SBA does not make such a determination. But even so, the amount paid by the individual(s) to purchase stock from the company must be consistent with the price per share paid by the business to redeem the stock.

The SBA also added a new provision in the SOP which gives borrowers an additional option when it comes to stock purchases. A borrower may choose to form an entity to purchase all of the stock of the selling business (with an SBA loan). The selling business would then be absorbed into the acquiring business, and the purchased stock would be retired.

Lenders must be careful to make sure that any owner of 20% or more of the business' stock at the conclusion of the transaction guarantees the loan. For example, if the change of ownership is between existing owners, an individual may own less than 20% of the company prior to the change of ownership; but if the individual will own 20% or more of the company once the business redeems the stock, he or she must guarantee the loan.

Another thing to keep in mind is that lenders must still obtain a certification from the borrower business, acknowledging that (i) the loan proceeds are being used to acquire all or part of the business' stock, (ii) the business promises to be jointly and severally liable for the debt, (iii) the loan constitutes sufficient consideration for such promise, and (iv) the business waives any defense relating to failure of consideration. This certification is required per the 7(a) authorization boilerplate.

It is important to keep in mind the change of ownership provisions so that Lenders can have confidence that they have structured their stock redemption loans in a way that will not jeopardize the SBA guaranty.

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