I don’t know about you, but I’ve come close to an anxiety attack when I’ve thought about partnership buyouts. It’s tough to break up a partnership, whatever the reason.Adding to the headaches, SBA has always required the selling partner to completely depart from the business: The buyout must result in a complete fracture, which sounds very painful indeed. Even worse, SBA has described the selling partner as the “departing partner,” and I’ve often felt I should send flowers.
No more headaches. Just a few requirements. SOP 50 10 7 alleviates the anxiety for all parties: buyers, sellers, and lenders, allowing Standard 7(a), 7(a) Small, and SBA Express loan proceeds to finance partial buyouts. Of course, there are certain requirements: Both the business and the individual owner(s) acquiring the ownership interest must be co-borrowers on the new loan (13 CFR 120.202). But importantly, the seller may stay on as an owner, officer, director, stockholder, key employee, or employee of the business, making them a “partially-departed partner” instead of just a “departing partner.”
As with any change of ownership between partners, the business balance sheets for the most recent completed fiscal year and current quarter must reflect a debt-to-worth ratio of no greater than 9:1 prior to the change in ownership. Note that the required ratio is determined on last year’s financials and those of the current quarter and not on the proforma statement. If that cannot be demonstrated, the borrowers must contribute cash of at least 10% of the partial change of ownership purchase price.
… And considerable relief for lenders. SOP 50 10 7 has streamlined the process for verifying the cash contribution, allowing you to use the same processes to verify the equity injection as for similarly sized, non-SBA guaranteed loans. (SOP 50 10 7, pgs. 111- 112) . Beyond that, there are no new regulatory requirements specific to a partial buyout.
“Regulatory requirements” is the key term here. Prudent lending dictates that lenders assess the impact of a partial buyout:
- Who will assume the management responsibilities, if any, of the partially departed?
- What impact, if any, will the partial sale have on the business’ liquidity or its cashflow?
- The individual acquiring the ownership interest must meet SBA’s regular eligibility requirements and their credit must be analyzed as for any guarantor.
- And although the SOP doesn’t specifically state it, the credit memo should examine any impact of the transaction on the cash flow or liquidity of the business.
Yet much is left to the lender’s discretion. You’re required to use the same processes as for similarly sized, non-SBA guaranteed loans. At JRB, we recommend that lenders review their policies and procedures to ensure they cover all processes SBA requires.