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Buying a Business With an SBA Loan: The Legal Steps

| John M. McCormick | ,

Quick Answer

SBA 7(a) loans are the most common SBA program used to buy a business. SBA 504 loans finance major fixed assets, such as real estate and equipment, and can cover those components of an acquisition, but not the purchase of the business itself or its goodwill. SBA-financed deals add legal steps: a lender commitment letter, equity injection requirements, rules on seller notes, personal guarantees, and specific closing deliverables. SBA rules change periodically, so current requirements should be confirmed with your lender.

This article is part of our Legal Guide to Buying or Selling a Business.

SBA financing makes many acquisitions possible, but it also adds a third party with its own requirements. The purchase agreement must match the lender's terms, or the closing can stall at the last minute.

FeatureSBA 7(a)SBA 504
Common use in acquisitionsPurchase of a business, including goodwill, working capital, and equipmentReal estate and long-term equipment that are part of the deal
StructureLoan from a participating lender with an SBA guaranteeTypically a bank loan combined with a loan through a Certified Development Company
GoodwillCan generally be financedNot eligible; 504 proceeds are limited to eligible fixed-asset costs
FitMost business acquisitionsAcquisitions where owner-occupied real estate is a major component

What Are the Legal Steps in an SBA-Financed Acquisition?

  1. Negotiate and sign the letter of intent, with financing as a condition to closing.
  2. Complete due diligence while the lender underwrites the loan.
  3. Review the lender's commitment letter carefully, including conditions, guarantees, collateral, and required documents.
  4. Draft the purchase agreement to match the commitment letter, including price, structure, any seller note, and closing conditions.
  5. Address seller note subordination or standby terms required by the lender.
  6. Form the buyer entity and confirm ownership percentages, since owners of 20% or more generally must personally guarantee the loan (13 C.F.R. § 120.160).
  7. Obtain landlord consent and confirm the lease term will satisfy the lender.
  8. Coordinate payoff letters, lien releases, and closing deliverables with the lender and closing agent.

How Does the SBA Affect Seller Financing?

SBA lenders typically require a seller note to be subordinated to the SBA loan, and in some cases payments must be on standby for a period of time. Whether a seller note can count toward the buyer's equity injection depends on the current SBA rules and the lender's approval. Sellers should understand these terms before agreeing to carry part of the price. SBA rules also permit partial changes of ownership, in which the seller keeps a minority stake, but the SBA's procedures impose conditions on that structure, and a seller who keeps 20% or more generally must guarantee the loan as well. Our article on earnouts and seller financing covers how sellers can protect a note.

Common Causes of Delay

  • A purchase agreement that does not match the commitment letter
  • Landlord consent or a lease too short for the lender's requirements
  • Missing tax returns or records needed for underwriting
  • Unresolved liens on business assets
  • Late changes in buyer ownership that trigger new guarantee requirements

Attorney Insight

Our firm has represented buyers in SBA 504-financed acquisitions, and the most important habit is to read the commitment letter side by side with the purchase agreement. Every condition in the commitment letter should have a home in the deal documents and an owner responsible for it. That alone prevents most closing-week surprises.

Frequently Asked Questions

Can I buy a business with no money down using an SBA loan?

SBA acquisition loans generally require an equity injection from the buyer. The required amount and acceptable sources depend on current SBA rules and the lender.

Do I have to personally guarantee an SBA loan?

Generally, yes, if you own 20% or more of the borrower (13 C.F.R. § 120.160). The SBA or the lender can also require guarantees from other people or entities regardless of ownership percentage.

How long does an SBA acquisition take to close?

It depends on the lender, the complexity of the business, and how quickly documents are produced. Starting legal work early helps keep the timeline on track.

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Talk With an M&A Attorney Before You Sign

McCormick Law & Consulting represents buyers and sellers in business acquisitions, primarily in Virginia and North Carolina and in transactions that cross state lines. The transactions in which we have represented a party total hundreds of millions of dollars in combined deal value, a measure of the size of those deals, not of amounts recovered or earned for clients. We have formed roughly a thousand new business entities and currently represent hundreds of businesses, so we approach every deal from the operating side as well as the legal side. Every transaction is different, and the size or outcome of past deals does not predict the result in yours.

With offices in Norfolk, Virginia and Raleigh, North Carolina, we handle most of our transactions in those two states and also assist clients with multistate transactions. If you are buying or selling a business, a short call early in the process can save time, money, and leverage later. Learn more about our mergers and acquisitions practice.

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This article provides general information only. It is not legal, tax, or financial advice and does not create an attorney-client relationship. Laws differ by state and change over time. Our attorneys are licensed in Virginia and North Carolina. We assist clients with business transactions involving multiple states. For matters involving the law of a state where we are not licensed, we associate with appropriately licensed counsel or otherwise proceed only as permitted by applicable law.