🎙️PODCAST REVIEW: The SBA Changed the Rules Again with Lisa Forrest — John A Martinka
Featured this week 11–28- 23 in TheHub Mainstreet M&A news and events:
Subscribe Now: https://acqhub.substack.com/about
The Hub Short Take:
Lisa Forest, a banking professional at Live Oak Bank, discusses the latest updates to the SBA’s guidance on business acquisition and similar loans. She highlights the introduction of partial change of ownership, allowing sellers to retain a minority stake in the company. Lisa also explains the changes in equity requirements, including the use of seller notes and home equity lines of credit (HELOCs) for down payments. She emphasizes the importance of a strong buyer-seller relationship and the need for buyers to have a vested interest in the business. Lisa concludes by discussing the various deal structures being used in the market, such as earnouts, clawbacks, and forgivable seller notes.
Key Takeaways:
- The SBA now allows partial change of ownership, allowing sellers to retain a minority stake in the company.
- Sellers who own less than 20% and are not considered key do not have to personally guarantee the loan.
- Equity requirements have changed, with seller notes now able to cover up to 100% of the down payment.
- HELOCs can be used for down payments, and the SBA no longer requires outside sources of income to cover the increased debt.
- Deal structures are becoming more varied, with the use of earnouts, clawbacks, and forgivable seller notes.
Quotes:
- “The SBA has introduced another structuring opportunity with partial change of ownership.”
- “Sellers who own less than 20% and are not considered key do not have to personally guarantee the loan.”
- “HELOCs can now be used for down payments without requiring outside sources of income.”
- “Deal structures are becoming more varied, with the use of earnouts, clawbacks, and forgivable seller notes.”
The Guest:
Lisa Forest is a banking professional at Live Oak Bank. She specializes in SBA loans and has extensive experience in business acquisition and similar loans. Lisa is known for her expertise in navigating the complex world of SBA lending and providing valuable insights to clients.
The Host:
John Martinka is known as The Escape Artist® because of the work he does in three areas:
Helping executives escape the corporate world by buying the right business the right way
Creating large exits for small businesses so the owner can exit with style, grace and more money
Accelerating businesses so they escape their plateau, with a speciality of using Growth by Acquisition
Getting the Deal Done: Navigating the Changing Landscape of Business Acquisition Loans
This article is based on an interview from the Getting the Deal Done podcast series featuring Lisa Forest from Live Oak Bank.
Today, we reviewed the Getting the Deal Done podcast. In this episode, they have a special guest, Lisa Forest from Live Oak Bank, who discusses the latest updates and changes in the world of business acquisition and similar loans. The Small Business Administration (SBA) has recently released several updates to its standing operating procedures, and Lisa provided insights into these changes and their implications.
Partial Change of Ownership: A Groundbreaking Development
One of the most significant updates is the introduction of partial change of ownership, which allows buyers to purchase a portion of the seller’s entity instead of a complete buyout. This is a groundbreaking development in the SBA ecosystem, as conventional lending has always followed the model of 100% buyout. Lisa explains, “The SBA has introduced another structuring opportunity, and I am really interested to see how this plays out.”
She further clarifies that in the case of a partial change of ownership, the seller does not retain a role but instead retains a percentage of ownership in the resulting stock redemption. This is particularly beneficial in industries such as home services, where licensing requirements can be challenging for the next generation of entrepreneurs. By allowing sellers to retain a minority ownership stake, their licenses can still be utilized, ensuring a smooth transition and continuity of operations.
Changes in Equity Ownership and Down Payments
The SBA has also made significant changes to the rules regarding equity ownership and down payments. Previously, buyers were required to provide a 10% down payment, with 5% coming from the seller in the form of a seller note. However, the new guidelines allow for more flexibility in structuring the equity injection.
Under the updated rules, the seller note can now account for up to 100% of the entire equity if it is on a two-year full standby, meaning no principal and interest payments are made for the first two years. After the two-year period, the note must be fully amortized, with no balloon payments allowed. However, there is still some ambiguity regarding the specific terms of the amortization, and further clarification from the SBA is expected.
Additionally, if the seller note is on a two-year standby with interest-only payments, 75% of the 10% equity can come from the seller, while the remaining 25% must come from the buyer. Again, there is a requirement for full amortization after the two-year period, but the exact terms are subject to interpretation by individual lenders.
Using Home Equity Lines of Credit (HELOC) for Down Payments
Another significant change is the allowance for buyers to use their home equity lines of credit (HELOC) for down payments. Previously, buyers were required to have outside sources of income to cover the increased debt from the HELOC. However, the SBA has removed this requirement, allowing buyers to use their HELOC for down payments as long as they can demonstrate that all sources of repayment can cover the total debt. This opens up new possibilities for buyers to leverage their home equity and access additional working capital for their businesses.
Market Conditions and Deal Structures
In terms of market conditions, Lisa notes that the current environment has led to longer due diligence periods and increased scrutiny from both buyers and sellers. Sellers are now demanding larger seller notes to mitigate risk, and buyers are conducting more thorough evaluations to ensure the sustainability of the business they are acquiring.
Deal structures have also evolved, with an increasing trend towards forgivable seller notes and earnouts. Forgivable seller notes are being used to bridge valuation gaps and provide additional security for sellers. These notes often include clawback provisions tied to the performance of the business, ensuring that the uptick in performance seen in recent years is sustainable.
Lisa also highlights the importance of customer concentration as a factor in deal structures. She shares an example where a buyer included a clawback provision in the seller note to account for the risk associated with a significant customer concentration. This type of structure allows buyers to adjust the price based on the performance of key customers, ensuring that the deal remains viable even in the face of potential customer loss.
Implications and Future Outlook
The changes in SBA guidelines and the evolving deal structures have significant implications for both buyers and sellers. Buyers now have more flexibility in structuring their equity injections and can leverage their home equity to access additional working capital. Sellers, on the other hand, have the opportunity to mitigate risk through forgivable seller notes and earnouts.
Looking ahead, it will be interesting to see how these changes impact the valuation of businesses and the overall market dynamics. The sustainability of the recent uptick in performance will be a key factor in determining the success of forgivable seller notes and earnouts. Additionally, the use of minority investors and their industry expertise can provide valuable support for buyers, further enhancing the potential for successful acquisitions.
In conclusion, the ever-changing landscape of business acquisition loans requires buyers and sellers to stay informed and adapt to new guidelines and structures. The recent updates from the SBA offer new opportunities for buyers to acquire businesses and for sellers to mitigate risk. By leveraging these changes and working with experienced lenders, buyers and sellers can navigate the complexities of the market and achieve successful outcomes in their acquisition endeavors.
Note: This article is based on a transcript from the Getting the Deal Done podcast series featuring Lisa Forest from Live Oak Bank. All quotes and information are verbatim from the original transcript.
Join us next week as we continue to sift through the wealth of information out there, helping you understand what it takes to excel in today’s dynamic business environment.
- Be sure to subscribe.
Written by the team at How2Exit.com
