According to the SBA, any business that took out an Economic Injury Disaster Relief loan (“EIDL Loan”) in excess of $25,000.00 and wishes to sell or transfer ownership of the business through a merger, stock sale, or asset sale will require SBA approval.  During the initial phase of funding for EIDL loans over $25,000.00 the SBA required a security interest in the assets of the business, but no personal guarantee.  Thus, in the absence of fraud, if a business failed the SBA could only recover the assets of the business.

The second round of EIDL Loans funding enticed many owners into signing a personal guarantee for any additional funds which raised a business’s total outstanding EIDL loan funding over $200,000.00.  Many owners took advantage of this funding, but some now find themselves wanting out of the business.  Small business sales typically involve some form of owner financing.  As a result, many business owners now find themselves in a situation where they want to sell the business, but they will not receive enough upfront money to pay off the EIDL Loan.   Owners are left with few choices other than obtaining SBA consent for the change in ownership.

Owners who seek SBA consent for sale should keep in mind the SBA’s concerns.  The SBA issued these EIDL Loans without going through any of the normal due diligence they would have conducted pre-COVID.  Anyone who has ever closed a loan with SBA before understands they did an extensive review of the business and borrower before issuing any loans.   With the EIDL Loans, the SBA may have obtained a personal guarantee from a borrower, but they have not always properly vetted the borrower to determine the value of a personal guarantee.  On EIDL Loans where the SBA holds no personal guarantee then the only collateral the SBA has are the assets of the business.  For these reasons, the SBA may be reluctant to allow a business to be transferred without having the EIDL Loan paid off in full at closing.  Borrowers should expect that if the SBA does allow a transfer, they may in fact request a personal guarantee from the new owners of the business. 

The most obvious solution is to pay off the EIDL loan at closing, but if that is not possible then a business owner may find that it is more important than ever to vet the purchaser who seeks self-financing.  Ideally, an owner will be successful in getting approval for the sale from the SBA, but in the alternative, an owner may have to take a different approach, perhaps through an option to purchase that can only be fully executed once the buyer can bring enough funds to the table to pay off the EIDL.   

No matter what business owners decide to do, it will be imperative that they obtain legal advice.  The Miller Law Firm, P.A. is ready to assist those in need.  Please feel free to give us a call at (864) 527-0413.