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New Change of Ownership Requirements found in revised SOP 50 10 5(E)

The SBA has provied a Change of Ownership Requirements, which can be found in revised SOP 50 10 5(E), effective July 1, 2013.  The SBA has published the amendment to its 7(a) change of ownership requirements, which new requirements appear in a revised version of SOP 50 10 5(E), at Pages 139-142.

The new policy recognizes that frequently it is an individual, not a business, that purchases an existing business. Under the new policy, SBA now will permit a change of ownership transaction to be structured with an individual purchaser being a co-applicant/co-borrower. The new guidelines also include specific mention that the transaction can take the form of an asset purchase.  While recent interpretation by SBA allowed asset purchases, because the SOP was silent on the eligibility of these types of transactions, there had been some contrary decisions from SBA on this subject.  Following the effective date of this change, the test is whether the loan applicant is purchasing “all or substantially all of the assets of the Seller’s business or is otherwise continuing the operation of the Seller’s business.”

The SOP continues to describe two eligible changes of ownership scenarios.

  1. In a change of ownership between existing owners, an existing owner(s) of a small business may purchase the ownership interest of one or more other owners resulting in 100% ownership of the business by the purchasing owner(s); or, the small business may redeem the ownership interest of an exiting owner resulting in 100% ownership by the remaining owner(s).    
  2. In a complete change of ownership situation, a small business may purchase 100% of the ownership interest in another business; an individual who is not a current owner may purchase 100% of the business; or a small business may acquire another small business through an asset purchase. 

SBA continues to prohibit loans made solely to individuals. Specifically, in a change of ownership transaction that includes an individual as a purchaser, the small business and the acquiring owner must be co-borrowers.  In this situation, SBA requires that the Note be executed by both the individual and the business that is being acquired; and SBA states that if the acquired business successfully denies liability for the debt based on an alleged failure of consideration under applicable state law, SBA may deny liability on its guaranty.   NAGGL, based on communication with counsel, has advised that it believes that, while the possibility of a denial of liability under this circumstance sounds ominous on first reading, this is a very unlikely scenario since the business being acquired is getting the benefit of new ownership and business continuity; therefore, it is unlikely that the business could successfully argue that it had not received a benefit from the loan. 

In the case of a change of ownership involving a company’s redemption of the ownership interest of one of its exiting owner(s), the business must be the borrower, and the remaining owner(s) may be either a co-borrower(s) or a guarantor(s). 

In a change of ownership involving a business either purchasing 100% of the ownership interest in another business or acquiring the other business via an asset purchase, the acquiring entity may be the borrower, or the acquiring entity and the small business being acquired may be co-borrowers.       

SBA also has amended its documentation requirements to require an analysis of how the change of ownership will “promote the sound development and/or preserve the existence of the business being acquired.”   All other requirements remain the same, including the prohibition against a seller remaining in the business as an officer, director, stockholder or key employee, although a short term consultancy contract is still allowed. 

The requirement that the change of ownership must result in 100% ownership of the business also remains, so it still will be ineligible for an individual to use 7(a) proceeds to acquire only a portion of a small business, in effect “buying into” the company.

The revised SOP 50 10 5(E) is available in two versions on sba.gov and carries an Effective Date of July 1, 2013.

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