New Possibilities Emerge for Business Owners Considering Partial Change of Ownership with 7(a)
SBA no longer makes selling your business an all or nothing proposition
Prior to the recent changes to the SBA rules, sellers were required to sell 100% of their business to potential buyers. Additionally, they could only stay on for a maximum of 12 months as a consultant to ease the transition to new owners.
When SBA allowed for a partial change of ownership a few months back, industry experts thought this would open a lot of doors. However, the agency preserved a technicality (known as the “Six month look back rule”) that ended up killing most deals.
In any Change of Ownership deal where the seller stayed on as a partial owner, the SBA would “look back” to the ownership percentages 6 months prior to closing the transaction to determine who was to guarantee the loan. The result was that anyone who owned more than 20% of the company 6 months ago, was now required to guarantee. This effectively killed most deals, except for transactions with related parties.
The good news is that the rule has changed again! With the latest revisions, the Guarantor requirements are now determined by the percentage of ownership post-closing. In this article, we explore three different scenarios where the new rule will be helpful for sellers, buyers, and the overall M & A community. Keep in mind that the potential buyers for all of these scenarios could be internal or external. If the business owner has key employees, family members or external third parties, the concepts will apply the same.
Business owners that are ready to retire but want to have limited involvement for a few years.
Victor Martinez has been the longtime owner of Vic’s Auto repair for over 25 years. He would love the opportunity to travel more with his wife and visit the grandkids across the country. Thinking about that leads him to want to retire. Although he is ready to hand the reigns over to a new owner, he is also willing to retain a small percentage of ownership (under 20%). He hopes to provide ongoing consulting and sales services to supplement the business a few more years. Under the new rules, he is now able to do exactly this without having to personally guarantee the debt. In offering this flexibility, Victor is going to widen the pool of potential buyers who can purchase his business.
Business owners want to bring in a partner(s). He also wants to remain actively involved and sell his remaining share for a second bite of the apple down the road for a higher multiple.
Frank Sanchez has owned his widget manufacturing business for over 10 years now. Although he has maintained nice growth at ten million in revenue and about one million in EBITDA, he has hit a wall. There are not enough hours in the day and the business is getting bigger, and Frank can no longer handle it by himself. He’s considering bringing in partner(s) to complement his strengths and shore up his weaknesses. He is also willing to sell as much as 70% of the business or as little as 30%, depending on what is brought to the table. With the right ownership team, Frank knows the business could grow up to $20-30 million in sales and $3-5 million in EBITDA, making it strong enough to be sold for a better multiple down the road. Frank will still be key management and will own more than 20% of the business, so he will need to guarantee the debt, but this will give him access to adding a partner that he did not have before. The new SBA rules help make this possible and can open a whole new world of opportunities for this type of situation.
Multiple existing partners and it is time for someone to leave, but not everyone. The existing partners do not want to buy the exiting partners out themselves.
Small Town Vet Clinic has been an important part of the community for several years. The Senior Partner, Dr. Mary, is ready to retire. The Junior partner, Dr. Bobby, is happy to take on a new partner(s) to replace Mary. She no longer enjoys the work, and it has reflected poorly in her relationship with clients. However, Bobby does not want to buy her out himself, and he is far from retirement age. Under previous SBA rules, this would create a real problem. Bobby either had to buy out Mary himself, or agree to sell as well because of the 100% exit rule. Although Bobby would need to guarantee the loan with the new partners in this scenario, he can still be a part of the business and not be forced to buy the partner out. Now with the changes, there are multiple possibilities of structuring an exit for Mary that works for everyone involved.
New Opportunities for Growth
These new rules open a world of opportunities to existing business owners, buyers, and M & A advisors that were once not available for transactions in the small business space. Structuring these types of scenarios in lower middle market financing is now commonplace, but was not something we could offer buyers that wanted to utilize SBA financing. At VelocitySBA, we are eager to walk you through this changing world, and help uncover new growth opportunities for you and your clients.
About the author
Bill King is a Certified M & A Advisor, licensed investment banker, published author and public speaker. Prior to joining Velocity SBA as a regional sale manager, Bill ran his own consulting business for several years and has over 20 years banking & financial services experience. To learn more about SBA financing options, our referral program, or to join the VelocitySBA team, reach out to Bill at bking@VelocitySBA.com or 580-583-1017. #TheSBAKing