Every now and then Julie calls me. She’s a long-time veteran of the SBA world, so usually we just swap war stories. But the other day she asked me a question. I’ll bet you’ve had to answer this one from time-to-time.
JULIE. Richard, one of our borrowers wants to bring in a new partner who will own 10% of the company. The new partner doesn’t want to guaranty the loan or have to submit a lot of paperwork. What do we have to do?”
RICHARD. Well, the good news is that the new partner really doesn’t have to submit anything. At least in theory. He won’t own 20% or more of the business, so no personal guaranty is required. But no matter when the change of ownership occurs, SBA must approve it.
Naturally, if the new partner will own 20% or more, it has to guaranty the loan, or if it is going to be a key employee or officer, you have to watch out for potential 912 issues. Other than that, search the SOP all you want, there’s no prohibition about changing ownership. (SOP 50 10 5 (K), Subpart B, Chapter 7, G. 3, pg. 237)
But wait! There’s more! We gotta dig deep. The SOP requires the borrower to sign Form 2289 at loan closing. Because borrowers want their money, every borrower signs that form. By signing, the borrower agrees to these conditions in Form 2289:
“12. Ownership Changes—Borrower and Operating Company will not, without the prior written consent of CDC and SBA, change the ownership structure of or interests in the Borrower and Operating Company during the term of the Note, provided that, commencing six months after the Debenture sale, Borrower or Operating Company may have one or more changes in ownership without approval of SBA so long as the cumulative change over the term of the Note is less than five percent (5%).” (SOP 50 10 5 (K) Subpart C, pg. 347 refers to the requirement.)
So, Julie, ownership of the borrower cannot change during the term of the loan without SBA approval except that six months after funding, the borrower can change up to 5% ownership without SBA approval.
JULIE. Richard it sounds like the SOP says there cannot be a change of ownership without SBA approval until at least six months after the loan funds. Then, if ownership changes during the term of the loan are less than 5% cumulative, SBA has to agree. That about right?
RICHARD. Well, kind of. You see, page 366 of the SOP states “CDCs may not unilaterally approve any adjustment to or change in the ownership of a Borrower, including a change in percentage of ownership, for 12 months after final disbursement on any loan.” (SOP 50 10 5 (K), Subpart C, Chapter 9, IV. A. 1)
Put ∙em together and what have we got?
- SBA must approve all changes of ownership;
- but the borrower can unilaterally change up to 5% of its ownership during the term of the loan.
- A CDC cannot unilaterally approve a change of ownership until 12 months after funding.
Julie, your change of ownership is for 10% so you must get SBA approval. But what if it were less than 10%? What if you requested a 4% change of ownership?
What happens in actual practice? At JRB, it is our experience that the Servicing Centers go by the 12-month rule. In other words, SBA does not approve changes of ownership for the first year of the loan. Yet we have found that the Servicing Center will consider a reasonable request even if the loan is less than 12 months old.
If the change will improve operations or collateral, go ahead. Build a case for it. Just cut through all the language of the SOP and get to the heart of the matter: Does the change benefit the borrower, or further protect the lender? If so, you have a reasonable expectation that SBA will approve the change.
Senior Associate, CDC/504 Programs