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New Changes of Ownership Policy in revised SOP 50 10 5(E)

The SBA finally has published an amendment to the 7(a) change of ownership requirements, which will facilitate change of ownership financing. These appear in a revised version of SOP 50-10 5(E) effective July 1, 2013. The amended change of ownership requirements acknowledge that an individual rather than a business may purchase an existing business.

The SBA now will permit a change of ownership transaction structure where an individual is a co-borrower applicant. Significantly, the new guidelines also provide that the transaction can be structured as an asset sale rather than restricting change of ownership transactions to stock or membership interest sales. The requirement that the change of ownership must result in 100% ownership of the business remains; hence, it would not be permissible to structure a transaction so that a 7(a) loan is used to acquire a portion of a small business.

There are two eligible changes of ownership structures:

  • Where the change of ownership is between existing owners, (an) existing owner(s) may purchase the interest of one or more owners resulting in 100% ownership in the acquiring owner. The transaction can also be structured as a redemption of stock or membership interests owned by the selling owner. Where an individual is purchasing the stock in the change of ownership between existing shareholders, the individual purchasing shareholder must be a co-borrower with the small business entity. Where a transaction is structured as a redemption, the business must be the borrower and the remaining owners can be either co-borrowers or guarantors of the SBA 7(a) loan.
  • Where there is a complete change of ownership – (i) a new business may purchase 100% of the ownership interest in the acquired business, (ii) an individual may purchase 100% of the ownership interest in the acquired business or (iii) a small business may purchase the assets of another small business. Where change of ownership involves an individual purchasing the stock from the existing shareholder, the individual must be a co-borrower with the small business entity. Where the change of ownership involves a business purchasing 100% of the ownership interest in another business or acquiring the assets of the other business, either the acquiring entity or the acquiring entity and the acquired entity may be co-borrowers.

This is certainly good news to lenders and their borrowers in structuring change of ownership loan transactions.

Alison Rind is an attorney at Lerch, Early & Brewer in Bethesda, Maryland. She represents commercial lenders in loan transactions and other commercial matters, including participants in SBA and other government-guaranteed lending programs. Arnold Spevack is a commercial lending attorney at Lerch, Early & Brewer who represents individuals, businesses, lenders and borrowers in financings, closings, negotiations and in the courts. For more information about the new SOP changes, contact Alison at (301) 657-0750 or awrind@lerchearly.com or Arnie at (301) 657-0749 or adspevack@lerchearly.com.

This content is for your information only and is not intended to constitute legal advice. Please consult your attorney before acting on any information contained here.

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