- 3 Things to Know About Preparing Your SBA Business for Sale - February 14, 2019
- Can I Sell My Business For Less Than I Owe the Bank? - January 7, 2019
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For many businesses, the ultimate goal is to sell the business. Can you picture it? Walk away from the daily stress and aggravation with a fat pile of cash. Hop a plane to your favorite tropical destination and spend the rest of your days lounging a white sandy beach, sipping pina coladas out of a coconut, without a care in the world.
Well, friends, the above scenario is the ideal scenario. I like sipping cold drinks on a beach as much as the next guy, and I hope that happens for you. But if you clicked on this article, you may be looking at a much different scenario.
And that’s what this article is going to cover: the less-than-ideal scenario.
I spend my days helping borrowers who can’t repay their SBA loans, but this advice is applicable to many types of small business loans. So let’s set the table with an example:
When you bought your widget business, you took a loan from XYZ Bank for $400,000. Three years later, you’ve had enough, and decide to sell. To your disappointment, your business broker can only elicit offers for $200,000, and you’ve only paid your SBA loan
Your Bank Likely Has A Security Interest In Business Assets
Remember when you took your business loan and signed that huge stack of papers? One of them was likely a security agreement. In that agreement, the bank took a security interest in all the business assets Furniture, fixtures, equipment, inventory, intangibles, etc.
The basic idea of the security agreement is that it’s the bank collateral. If you close the business, the bank has the right to sell the equipment to recover their money. The bank also has the right to keep their security interest intact until the loan get repaid in full.
So if the bank gets to keep their security interest on your assets until they get paid in full, how does one sell their business for less than what’s owed? It’s simple: you need to get the banks permission.
This is an important point to stress. Ignoring it could be disastrous. I’ve gotten lots of calls over the years from business owners who sold their business without getting bank permission. In addition to jeopardizing any chance to settle, selling the assets that are pledged is could be viewed as a fraudulent conveyance. In a situation like that, the bank could seek to repossess the assets from the buyer, and obviously cause you a huge problem. Double it if you pocketed the sales proceeds or used them to pay other creditors.
The bottom line: if the sale price won’t cover the entire loan balance, you need to get your bank’s permission.
Buyers Will Require Clean Title To The Assets
Selling a business is similar to selling a home in many ways. When you sold your house, your buyer (or their attorney or title company) made sure that they took “clean title” to the property. This means that there are no liens or encumbrances other than the mortgage you take to purchase the home.
In other words, the BUYER requires that the assets come to them free and clear. And guess what? Same deal when it comes to business assets. The reason why this matters is that a buyer only wants the asset, not the accompanying liability. The last thing a restaurant owner would want is to pay $1000 for a commercial pizza oven, only to learn it has a $350K lien against it.
Selling The Business Without Bank Permission Can Kill A Settlement
When a buyer seeks to “short sell” their business, the bank immediately asks: “how are you going to repay the remaining balance?”. That’s where the settlement comes in, or in SBA terms, Offer In Compromise.
But here’s the thing. In order to settle an SBA loan, the SBA specifically states that there must be no fraud or misrepresentation. Selling assets that your bank has a security interest in can surely be interpreted as fraud or misrepresentation. Your bank won’t like it, the SBA won’t like, and your buyer won’t like it.
Since the end goal is walk away with no further liability, you’re best bet is do everything by the book. That means submitting any offer to the bank once you have one, and ensuring that all the funds from the sale are transferred to the bank in the matter they see fit. Some banks are fine with you getting paid directly, then sending a check to them. Other banks want checks made out to them directly to avoid any chance of the funds going anywhere but to them. If you are unsure, ask! Always err on the side of caution.
Yes, it’s possible to sell your business for less than you owe to your small business lender. If you find yourself in this situation be sure to clear any sale of business assets that is not part of normal operations with your lender first. Assuming there is a deficiency that you can’t afford to repay, you’ll want to consider an Offer In Compromise (i.e. a settlement). If your lender thinks you tried to pull some shady maneuvers, that will make the settlement process considerably harder.
Have a poorly performing health care business which will be absorbed by a larger PE backed company. What can we do with our SBA 7 a (personal guarantee and collateral) loan if the buyer does not want to assume it? Are we ok to just repay it as promised monthly as planned ?
The answer to your question may be found in your SBA 7a loan agreement.
There should be a section addressing a sale, acquisition of assets, etc. in your agreement.
The matter may be found in the termination clause.
Good luck to you as you wind things down!
In most cases, it’s difficult to have the buyer assume 7a debt, so chances are you’ll need to deal with the deficiency on your own.
Depending on the size of the deficiency, you will either need to make up the difference out of pocket, or pursue an Offer in Compromise. Whether or not you will qualify for an OIC will depend on a number of factors.
If your interested in scheduling a case evaluation, you can do so through my site:
Can I sell the fixtures in my business because Landlord wants a clean store but the fixtures belong to SBA. If I don’t take out the fixtures, the landlord will bill me the rent. So what is the solution? Please explain.
I am not certain what you mean by the fixtures in your business belong to the SBA.
If you have an SBA loan, it’s likely there is a loan covenant in your SBA agreement stating you shall not sell any of your business’ fixed assets without paying off the loan balance. This doesn’t mean the SBA owns the assets. Your business owns the assets.
If you’re closing or selling your business, moving out of your rented space and have a clause such as that described above, I recommend contacting the SBA by phone or visit to address the matter.
Hope this helps a bit…
I received an EIDL in 2020. My business is not profitable and to avoid bankruptcy, I have an opportunity to sell the business for less than the amount I owe to SBA. Is there a way to navigate a settlement to remove the UCC in order to sell? I have email and called the local SBA branch and continue to get bounced from person to person with no answer. Please help.
I am sorry you are struggling to get answers/direction. And I am not surprised.
What I can tell you is that the SBA is not going to remove your business’ UCC-1 filing for the EIDL amount owed UNTIL it’s paid off in full. That’s the purpose of the SBA (or any lender) of filing the UCC-1.
Unfortunately, the EIDL program is a direct SBA lending process with no bank or other lender sitting in between you and the SBA. I am afraid, that’s making it tough to get answers/direction.
If you’re having difficulty getting to speak with a local SBA officer, you may want to consider reaching out to your local congressman. They may have inside connections to help you speak to someone at the SBA to help you.
With that said, if your total EIDL amount is less than $200,000., you’ve not personally guaranteed the loan so your leverage is likely much better to get a settlement. If it is $200,000. or more, you have much less leverage to work with because you are on the hook personally for repayment of the full amount.
Hope this helps a bit Sharon…
Hi Sharon – The SBA took your business assets as collateral, which means you’ll need to get SBA permission to sell the assets. AS far as UCC removal, you should run a UCC search to confirm that it was placed. Due to the number of loans given over such a short period of time, the SBA didn’t file UCC liens in many cases. There are other options depending on how much you borrowed. Feel free to reach out directly to discuss.
I own a commercial restaurant space and my tenant closed and left town. I have a new tenant ready to go but the SBA has a UCC filing on the equipment and I can’t get the new guy in there until that it taken care of. How do I do that?
It’s not clear to me whether the equipment in your commercial space belongs to you or your former tenant.
If it belongs to you, your former tenant had no right to pledge it to the SBA.
Either way, I’d contact your local SBA office and inform them of the situation.
All the best…
Are sba loans transferable to the new buyer?
No, any loan — SBA or other lender — typically includes language in the loan agreement that states when a business (or the majority of its assets) is sold, the lender is to be paid in full.
All the best…
Can I sell all the corporation Shares and the new guys take responsibility of loan
Andy: If a buyer purchases all the shares of your corporation, they essentially take over the entire entity and that includes all its debts and liabilities. However, you may want to check with your lender to see if you have any personal liability associated with the debt, such as a personal guarantee.
I am a buyer I am buying a restaurant. The price of restaurants is 150 k but seller owes 300k . 150 from SBA EDIL loan and some of tax and landlord.
Now he is ready to pay all other debt he owes but he can’t repay SBA loan and he want to carry his loan with him to repay later as per schedule . How I can make this sale happened without taking his liability?
Do I need to make any note with seller ? Please guide me !
Structure of the purchase as an asset sale. That will ensure that you don’t assume any liabilities of the prior order.
Just be sure that the assets have clean title and that there are no UCC filings or any other liens or encumbrances against them. A UCC search will typically identify any lenders that are claiming security interest.
I have a business with an SBA loan that has been hit very hard by COVID. We are running out of money and won’t be able to cover our debt service payments. I have a cash buyer for the business at 40% of what the loan amount is for. In your experience what % of the loan amount do banks like to see to make a settlement? Can you also settle on EIDL loan. I also have an EIDL loan that we could pay 40% of the loan amount.Thank you
I am sorry you find yourself in this situation.
I do believe your Bank/SBA will consider whatever you have to offer. Whether the bank is willing to settle for less than what’s owed or to pursue a personal guarantee really depends on the circumstances.
Ditto for the EIDL, however you will have to deal directly with the SBA and not your bank.
Even though both loans fall under the SBA umbrella, they are dealt with differently.
All the best…
Hi, I don’t know much about SBA loan but my brother owns a business and recently received a SBA loan . He wants to transfers the business name over to me and take his name out of the business. The loan was under his name but he did claim the business as an asset. So with his name no longer in the business, is the shop still considered an asset? What should I do?
I am not following the part about your brother ‘claiming the business as an asset’. Could you please elaborate?
Then I’ll give it a whirl…