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Selling Your Business After An SBA Loan Default
|Last Updated on: 10th September 2023, 12:31 am
Selling Your Business After An SBA Loan Default
Defaulting on an SBA-backed loan can be devastating for a small business owner. And if you’re considering selling your company, having that black mark on your business credit file won’t help attract buyers. But with the right approach, you can successfully sell your business even after an SBA loan default.
Review the Loan Terms
Before proceeding with a sale, thoroughly review your original SBA loan agreement to understand your obligations. Key items to check for:
- Provisions requiring lender consent for partial or full sale of the business.
- Clauses making the loan immediately due if the business is transferred.
- Security interests or personal guarantees tied to business assets.
Knowing these loan stipulations helps avoid surprises and prepares you for what’s needed to sell.
Consider SBA Loan Assumption
One option may be having the buyer assume responsibility for repaying the defaulted SBA loan as part of the sale. This requires lender approval but prevents the loan being called due. The buyer takes over monthly payments until the balance is paid off.
Assumption also releases you from personal liability for the loan after the sale. But requirements like a down payment from the buyer, assurance of repayment ability, and a creditworthy guarantor can pose challenges.
Explore Refinancing Options
Another possibility is trying to refinance or consolidate your business debts, including the defaulted SBA loan, before completing the sale. This would allow you to pay off the SBA loan, remove the default from your business credit file, and transfer a clean slate to the buyer.
Business loan brokers or specialized SBA lenders may help find financing to clear SBA debt, but below average business credit scores make this difficult. Providing collateral or a co-signer improves the odds of refinancing success.
Negotiate With The Lender
Directly negotiating with your SBA lender could yield solutions to facilitate a business sale despite the prior loan default. Propose win-win options like:
- Lump-sum discounted payoff from sale proceeds.
- Releasing collateral liens in exchange for a portion of sale revenue.
- Allowing buyer assumption at a higher interest rate.
Approach the lender with a spirit of compromise and flexibility to make a deal work.
File Pre-Sale Bankruptcy
With the lender’s consent, filing Chapter 7 or Chapter 11 bankruptcy prior to a sale could eliminate the SBA loan burden entirely through discharge. Bankruptcy filings become part of the public record, but eliminate debt and clear the deck for a purchase.
Offer Seller Financing
Providing seller financing makes it easier to attract buyers who might shy away from lender preapproval due to your SBA loan default history. Carrying back a portion of the sale amount at favorable terms can sweeten the deal.
But use caution structuring seller financing since the defaulted SBA loan will still need addressing. Consult qualified advisors to avoid legal missteps.
Lower the Asking Price
Be prepared to lower your asking price to generate interest despite the black mark of an SBA loan default. Savvy buyers will negotiate for a discount to take on perceived risks and handle outstanding debt issues post-sale.
Valuing the company realistically and leaving room to negotiate will get more viable buyers to the table.
Include Indemnification Clause
It’s prudent to negotiate an indemnification clause obligating you to cover the buyer’s losses related to the prior SBA loan default after the transaction closes. This assures the buyer you’ll take responsibility for any problems.
Qualified business attorneys can draft appropriate indemnification language to include in the purchase contract.
Disclose Everything
When selling a business after an SBA loan default, full transparency about your financial history and current debts is essential. Attempting to hide problems could expose you to future litigation.
Truthfully disclose the default, missed payments, collection actions, outstanding balance and other relevant details so the buyer makes fully informed decisions.
Prioritize Advisory Help
Because of the complexities of selling after an SBA loan default, don’t go it alone. Consult experienced business brokers, attorneys and accountants for guidance navigating this tricky process.
The right professional advice provides the greatest assurance of clearing SBA debt issues and transferring clear title.
Be Creative and Patient
With flexibility, openness and professional support, there are multiple potential pathways to selling your business successfully even with the complication of a prior SBA loan default. Expect the process to take longer and be prepared to get creative in structuring agreements and resolving lender issues.
With tenacity and wise counsel, you can clear this major hurdle to get your business sold and move forward.
Helpful Resources
Selling Your Business After An SBA Loan Default
Defaulting on a Small Business Administration (SBA) loan can put business owners in a difficult position. The SBA has the right to seize assets and collateral if you default, so it may seem like you have no choice but to shut down your business.
However, you may still have options to sell your business and recover some value even after an SBA loan default. Here is what you need to know about selling a business after defaulting on an SBA loan:
Notify the SBA of Your Intent to Sell
The first step is to notify the SBA that you intend to sell your business. Under SBA regulations, business owners are required to get SBA approval before selling any assets that were used as collateral for an SBA-guaranteed loan.
Draft a formal letter to your SBA regional office, stating your intent to sell the business and requesting their approval. Explain your reasons – for example, that selling will allow you to pay off a portion of the defaulted loan. The SBA will likely work with you if they believe the sale will result in them recovering some of their funds.
Hire a Business Broker
Trying to sell a distressed business on your own is difficult. Consider hiring an experienced business broker to market your company and find potential buyers. A good broker understands the nuances of selling troubled businesses and can save you time and money.
Look for a broker with specific experience in selling distressed small businesses. They will know which buyers are open to purchasing a company with SBA loan defaults. The broker’s fees usually range from 10-15% of the sale price.
Gather Necessary Documentation
To attract buyers, you need to gather all the documentation about your business operations and finances. This includes:
- Tax returns for the past 3 years
- Profit and loss statements
- Balance sheet
- Accounts receivable/payable
- Inventory records
- Customer lists
- Sales records
Having detailed documentation demonstrates your business is organized and makes it easier for buyers to evaluate. Be open about disclosing debts, liabilities, and reasons for the SBA loan default.
Negotiate With the SBA
Before finalizing a sale, you will need to negotiate with the SBA to reach an agreement on distributing sale proceeds. Some key points to discuss:
- The SBA will likely claim the first proceeds up to your outstanding loan balance.
- Negotiate to retain some proceeds to pay off other business debts.
- If proceeds exceed your debt, argue to keep a portion as compensation for assets.
- Get SBA agreement in writing before completing the sale.
Having a commitment upfront on how proceeds get distributed will help finalize a deal.
Consider Filing Bankruptcy
If you cannot reach an agreement with the SBA, filing business bankruptcy may be an option. This pauses collections and gives you time to reorganize and sell off assets. Key bankruptcy options include:
- Chapter 7: Liquidates the business and uses proceeds to repay creditors.
- Chapter 11: Allows restructuring debts while continuing business operations.
- Chapter 13: Repays creditors via a court-approved repayment plan.
Talk to a business bankruptcy lawyer to discuss how this may impact your ability to sell the business.
Find the Right Buyer
The best buyers for a troubled small business often fall into a few categories:
- Former competitors – May want your customer base, assets.
- Strategic buyers – Larger companies looking to expand into your market.
- Liquidators – Will buy assets/inventory to resell.
- Employees – May do a leveraged buyout to keep jobs.
Consider offers carefully. A higher bid may have less certain financing or unrealistic projections. Prioritize good fit and ability to execute.
Be Flexible on Sale Terms
Given the business distress, you will need to be flexible to attract buyers. Consider options like:
- Seller financing – Carry a note for the buyer.
- Earnouts – Get paid from future business profits.
- Asset sale – Sell equipment or IP separately.
- Piecemeal liquidation – Sell off divisions or product lines.
A creative deal structure may secure a better price or at least salvage some value from the business.
Consider an Auction Sale
For maximum exposure, you may want to sell the business at auction. This creates a sense of urgency for buyers to bid. Options include:
- Live auction – In-person event for buyers to bid in real-time.
- Online auction – Reaches wider audience of buyers via webcast.
- Sealed bid – Buyers submit confidential bids by a set deadline.
Auctions can be risky if reserved price is not met, so have a broker advise you on setting appropriate reserves.
Close the Sale
Once you accept an offer, it’s time to close the deal. Key steps include:
- Negotiate final purchase agreement with buyer.
- Allow buyer to conduct due diligence.
- Obtain any required government approvals.
- Sign over assets and transfer intellectual property.
- Use proceeds to repay SBA loan balance.
A business attorney can help you navigate the closing process and finalize the sale.
Move On
Closing the sale of a distressed business can be a bittersweet milestone. But it also provides closure and allows you to move on. Important next steps include:
- Pay off remaining business debts.
- Terminate leases and business licenses.
- Dissolve the corporate entity.
- File final tax returns.
- Learn from experience and plan your next venture.
With the SBA loan default and business sale behind you, you can reflect on lessons learned and look ahead to new opportunities.