SBA rules · SOP 50 10 8.1
Does the seller have to guarantee the SBA loan?
Whether a selling owner must provide a personal guaranty depends on whether they completely exit the business or retain an equity interest post-sale.
Quoted from SBA SOP 50 10 8.1Every quote checked word for word
In detail
- Full exit: A seller who sells 100% of their equity is not required to guaranty the loan, provided they completely divest all ownership interest and sever any relationship with the business in any capacity, including paid or unpaid employment, for the life of the loan. If they fail to completely divest, any seller who held 20% or more within 6 months prior to application remains subject to the guaranty requirement under the 6-month lookback rule.
- Partial sale retaining under 20%: In a 7(a) partial change of ownership, a selling owner who receives loan proceeds and retains less than 20% direct or indirect ownership must provide a full guaranty for the full loan amount for at least 2 years after final disbursement. The seller may be released after 2 years only if the loan has been current for the prior 12 consecutive months, and they are not required to pledge personal residences or other personal assets for a collateral shortfall.
- Partial sale retaining 20% or more: Any owner, including a selling owner, who retains a post-sale direct or indirect equity interest of 20% or more must provide an unlimited full personal guaranty for the life of the loan.
- Sales to an ESOP: If the seller of an employer small business remains as a partial owner following a sale to an ESOP, the seller must provide a full, unlimited guaranty regardless of their percentage of ownership, which is a statutory requirement that cannot be waived.
- 504 loan program: A 504 loan cannot finance a partial change of ownership; the transaction must result in the applicant owning 100% of the business, and the seller may not remain as an officer, director, stockholder, or key employee, meaning the exiting seller does not provide a guaranty.
The source
What the SOP says
“When that Person completely divests their interest prior to the date of application. Complete divestiture includes divestiture of all ownership interest and severance of any relationship with the Applicant (and any associated Eligible Passive Company) in any capacity, including being an employee (paid or unpaid), for the life of the 7(a) or 504 loan.
“Any Person (as defined in 13 CFR 120.10) subject to the guaranty requirements 6 months prior to the date of the loan application would continue to be subject to the requirements even if that Person has changed their ownership interest to less than 20%.
“Any selling owner (one who receives loan proceeds in exchange for selling part of their ownership) who remains as a direct or indirect owner and owns less than 20% of the business post-sale must provide a full guaranty for the full loan amount pursuant to 13 CFR 120.160(a).
“The term of the guaranty must be for at least two years after final loan disbursement. The guarantor may be released only if the loan has been current for the consecutive 12 months period prior to release.
“SBA does not require these guarantors that are providing a 2-year guaranty to pledge their personal assets (i.e. Personal residences) in the event of a collateral shortfall.
“For 7(a) change of ownership transactions, except those that involve a selling owner who will retain an indirect or direct ownership interest less than 20%, which must comply with the previously stated guaranty requirements, the percentages for determining who must provide a guaranty will be based on the post-sale percentage of direct and/or indirect ownership in the business.
“Any individual who has direct and/or indirect ownership of 20% or more of an Applicant must provide an unlimited full guaranty.
“If the seller of the employer small business remains as a partial owner, the seller must provide a full, unlimited guarantee regardless of percentage of ownership. Note: This is a statutory requirement and cannot be waived.
“The change of ownership must result in the Applicant owning 100% of the business.
“The seller may not remain as an officer, director, stockholder or Key Employee of the business.
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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.