We accepted a letter of intent three weeks ago and the buyer is using an SBA 7(a) loan. The whole process has been eye-opening in ways I didn't expect. I thought an SBA loan was just the buyer's problem, but it turns out the seller has to produce a mountain of documentation and meet requirements too. I wish I'd known about the personal guarantee rules before we signed. Our deal is structured with a 5-year seller note, but the SBA requires the seller note to be fully subordinated and stand-by for the entire term if it's over a certain size, which I didn't realize. Now we're negotiating terms I didn't anticipate. Anyone else been through this and have advice on what to push back on?
SBA Loans
What I wish I knew about SBA requirements before accepting an offer
The seller note standby is a big one.If the note is more than 25% of the total project cost, it has to be on full standby for the life of the loan. That means no payments to you until the SBA loan is paid off or the loan matures. We had to restructure our note to 24.9% to avoid that. It's worth pushing the buyer's lender on how they calculate that percentage tbh.
Have you looked at the franchise directory requirement? If your business is a franchise, the buyer needs to show it's on the SBA Franchise Directory or get a franchise review letter. That added weeks to our timeline because our franchisor didn't have the right documentation ready.
The business valuation is another area where sellers get surprised. The SBA lender will require an independent appraisal, and if the appraisal comes in lower than the offer price, the buyer has to cover the gap or renegotiate. We had a $50k shortfall and ended up splitting it. It was frustrating because we'd already agreed on a pric.
That's a good point about the appraisal gap. Our buyer's lender hasn't ordered the appraisal yet, and I'm worried about the same thing. Did you have any leverage to push back on the price reductin, or did you just accept it to keep the deal alive?
I've been through two SBA sales as a seller. My advice is to get the buyer's lender to give you a written list of all seller requirements upfront. They'll usually share it if you ask. Also, the 10% equity requirement for the buyeR is strict, and if the buyer is putting in less, they may need a gift letter or a seller carry-back. Make sure the lender knows your deal structure before you sign the LOI.
Personal guarantee is a major issue. Even if you sell 100% of the business, if you're carrying a seller note, the SBA lender may require you to guarantee the loan. That's a deal killer for some sellers. We walked away from one deal because of that. Found a buyer with conventional financing instead.
Is it true that the SBA requires the seller to provide a 'standby' on the seller note only if the note is 5 years or more? I read that somewhere. Or is it based on the note term?
The standby requirement applies if the seller note is 25% or more of the total project cost. Then it's full standby (no payments) for the life of the loan. If it's less than 25%, the lender may allow payments after a certain period, but it's still on standby for at least the first 12-24 months. It's not about the note term, it's about the percentage. Always check with the lender though.
Closing costs and fees can be more than you think. The buyer usually pays them, but sellers often end up covering some of the appraisal, environmental, or legal costs if the deal falls through. We lost $8k in due diligence costs when a deal collapsed because the buyer couldn't meet the SBA equity requirement. Get a good letter of intent with clear cost allocation.
Thanks for clearing that up, JuniperMoss. I'm in the earlY stages of selling and this thread has been really helpful.
Appreciate all the input. I'm going to ask the buyer's lender for a written list of seller requirements and see if we can restructure the seller note to stay under 25%. The personal guarantee issue is still a sticking point, but hopefully we can find a compromise.