When selling your business, there are many factors to consider, including what to do about your Small Business Administration (SBA) Economic Injury Disaster Loan (EIDL). This loan, designed to provide financial assistance during times of economic hardship, can complicate the process of selling your business, so it is important that you review the necessary steps to properly address your SBA EIDL before selling your small business.
1. Understand the Terms of Your SBA EIDL / Communicate with SBA
Before making any decisions, it's crucial to thoroughly review the terms of your SBA EIDL. Familiarize yourself with the loan agreement, repayment terms, and any restrictions or obligations that may affect the sale of your business. In all cases with the EIDL loans, there lies an "assignment clause" and an "acceleration clause." The assignment clause requires you to obtain the SBA's consent before transferring your obligations to repay the loan to your buyer. The acceleration clause allows the lender to demand the entirety of the balance due immediately (accelerating the payback period) upon notice that you've impermissibly transferred ownership without consent from the SBA.
According to the SBA, any business that borrowed an Economic Injury Disaster Relief Loan in excess of $25,000 and wishes to sell or transfer ownership of the business will require SBA approval.
In some cases, you could have agreed to "personally guarantee" repayment of the EIDL when applying for the loan. Keep in mind the SBA’s concerns, the SBA issued these EIDL Loans in lieu of the typical, extensive review of the business's and borrower's income and asset the SBA is known for conducting before issuing loans. With the EIDL Loans, the SBA may have obtained a personal guarantee from the borrower, but did not always properly vet the borrower to determine the value of a personal guarantee.
On EIDL loans where the SBA holds no personal guarantee at all, 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, it may in fact request a personal guarantee from the new owners of the business.
If you are using an escrow company to facilitate the purchase and sale of your business, your lender will likely also provide the escrow company with the documents it requires for the transaction to be carried out. If possible, the seller should try to obtain a novation, whereby his or her obligations are released by the lender through the transaction.
2. Determine the Impact on the Sale Price / Inform Potential Buyers
Consider how the presence of an outstanding SBA EIDL may affect the sale price of your business. Potential buyers may view the loan as a liability, potentially impacting negotiations. If your loan is for a substantial amount, the buyer will simply deduct the amount of debt assumed from the original purchase price (unless, of course, the buyer decided on the price inclusive of the loan).
During the sale process, it is important to disclose the existence of your SBA EIDL to potential buyers. Transparency is key to maintaining trust and avoiding any legal or financial complications down the line. Provide clear information about the loan's impact on the value of the business and its payment's impact on the income of the business. Ensure you have accurate and up-to-date documentation related to your SBA EIDL, including loan statements, repayment schedules, and any correspondence with the lender.
3. If the SBA Consents, Include the SBA EIDL in the Purchase and Sale Agreement
When drafting the sale agreement, make sure to include provisions regarding the SBA EIDL. Clearly outline the responsibilities of the buyer and seller concerning the loan, including any repayment obligations, and the transfer of assets. Both parties should alter the precise terms found in the section of the contract listing other party's "representations" to account for acknowledgement of the loan.
4. What if SBA does NOT consent?
If financially feasible, you may choose to pay off the SBA EIDL before selling your business or at the close of escrow. This can eliminate the loan as a potential obstacle during negotiations and streamline the selling process. However, carefully evaluate your financial situation and consider the impact on your cash flow.
If it is infeasible for a business owner to pay off the EIDL, he or she should consider vetting the buyer who can pay off the loan or approach the deal with its own financing. Ideally, an owner will be successful in getting approval from the SBA to transfer the EIDL to the buyer of the business, but, in the alternative, the buyer can bring enough funds to the table to pay off the EIDL. This is done either by cash, or by finding its own lender to pay off the SBA in place of being the buyer's lender.
Conclusion
Given the complexities of selling a business with an outstanding SBA EIDL, buyers and sellers alike should always consult with legal and tax professionals experienced in these matters. They can provide guidance specific to your situation and ensure all necessary steps are taken to protect your interests.
Call Khalil Law Corporation for your business legal needs today!
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