SBA rules · SOP 50 10 8.1
Can an SBA loan be used to buy a business from a family member?
Yes, an SBA loan may be used to finance the purchase of a business from a family member, provided the transaction complies with standard change of ownership rules and the heightened due diligence required for transactions between related parties.
Quoted from SBA SOP 50 10 8.1Every quote checked word for word
In detail
- Business valuation requirements: Under 7(a), even when the business purchase price is $350,000 or less, the lender is not permitted to perform an in-house valuation if there is a close relationship between the buyer and seller, meaning an independent valuation from a Qualified Source is required.
- 504 appraisal and pricing rules: For 504 loans, an appraisal must be submitted with the application even if the property is valued at $500,000 or less when the transaction involves parties with a close relationship, such as family members. In non-arm's length and change of ownership transactions, the property must appraise for 100% of estimated value, and the purchase price is capped at the lesser of the as-is appraised value or the purchase price of eligible fixed assets.
- 504 submission method: Applications for projects that result in a change of ownership or involve transactions between close family members cannot be processed under the Abridged Submission Method.
- Seller role post-closing: In a 7(a) Initial Acquisition, the selling family member may not remain as an officer, director, stockholder, or employee, though the business may retain them as a consultant for up to 24 months. Under the 504 program, the seller cannot remain as an officer, director, stockholder, or Key Employee.
- Asset eligibility: A 7(a) loan can finance intangible assets such as goodwill, but a 504 loan can only finance eligible long-term fixed assets and cannot finance goodwill or receivables.
The source
What the SOP says
“If the Business Purchase Price is $350,000 or less, the Lender may perform its own valuation of the business being sold, unless there is a close relationship between the buyer and seller.
“The Project will finance a transaction involving parties with a close relationship (for example, transactions between existing owners or family members).
“For both non-arm's length transactions and change of ownership projects, the property must appraise for 100% of the estimated value. The purchase price is limited to the lesser of the As-Is appraised value or the purchase price of 504 eligible fixed assets.
“Applications for projects that result in change of ownership or transactions between close family members cannot be processed under ASM.
“Except as provided below, the seller in a Business Expansion or Initial Acquisition change of ownership transaction may not remain as an officer, director, stockholder, or employee of the business. If a transitional period is needed to assist the business, the small business may contract with the seller as a consultant for a period not to exceed 24 months (in aggregate, including any extensions).
“The seller may not remain as an officer, director, stockholder or Key Employee of the business.
“The 504 Project finances only the costs associated with eligible long-term fixed assets; the acquisition of any other assets such as receivables or goodwill is not an eligible use of 504 loan proceeds or Third Party Loan proceeds and must be financed by other means, which may include a 7(a) loan;
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This page quotes the SBA's Standard Operating Procedure 50 10 8.1. Lenders can ask for more than the SBA minimum. It is general information, not a loan approval or legal advice.