I’ve written about this topic before, but I keep getting calls about it, so I figured it’s time to write about it again. So let’s set the stage: Your business is not doing well. It’s got revenue, and it COULD be profitable if you didn’t have that pesky SBA loan payment. You’ve poured blood, sweat and tears into this business. Not to mention lots of your own money, even resorting to taking cash out of your IRA or 401K in order to avoid defaulting on your loan.
So what are my options?
I usually first answer this question by telling the borrower what they CAN’T do. The SBA SOPs (Standard Operating Procedures) do state that a business can continue to operate if it will save jobs, but in PRACTICE, I have never seen a situation in 10 years of being a full-time SBA workout consultant where the SBA has allowed a business to operate while reducing the loan balance (not including bankruptcy). So in reality, if you want to keep your business open, an SBA Offer In Compromise is generally NOT going to be an option.
Can I sell the business?
Yes, you can sell the business. Keep in mind that 100% of the proceeds must go to the bank to pay down the loan balance.
Can the sale of the business count towards my SBA Offer In Compromise?
No, unfortunately not. Many people argue that if it weren’t for their efforts to sell the business, the business assets would only be worth a few thousand dollars instead of the several hundred thousands that the business will sell for. While this may be true, the SBA doesn’t care. If you (or your advisors who lacks SBA experience) thinks you can negotiate this point, you will be sorely disappointed.
Can I sell the business to a friend/family/business associate?
The SBA’s general attitude is that sales should be “arm’s length”. This means that the buyer should be acting in their own best interests, and not doing it to help you settle your personal guarantee (a personal guarantee can only be settle once the business has been sold or closed, and the assets liquidated). Many people tell me that other consultants advocate finding a “buyer”, have them hold that business for 12 months, then you can just buy it back later. That’s obviously misrepresenting the situation. When I was a banker, we felt pretty strongly that this approach is fraudulent. If you have an idea like this, or maybe one where the buyer wants you to work for the business after you sell it to them (I’ve seen these get approved), the best thing to is simply disclose it to your lender. If the lender and the SBA are agreeable to the structure, then great, you are all set. But if they say no, then at least you’ve made an honest attempt to resolve the situation.
Can I open another business doing the same thing?
It depends. If you are a CPA, and plan to close, then re-open your business with the exact same customers, I would say the bank won’t like that (but honestly, would be hard for them to stop). If you are a CPA, and you plan to start a new business offering the SAME services but with DIFFERENT clients, that’s acceptable. The intent of the SBA rules is not to limit your ability to work, but rather to insure that if they are going to settle, that you aren’t going to benefit from the business financially going forward.
I hope this article clarifies the issues that can arise when wrestling with selling or closing your SBA-funded business. If there is anything that I haven’t covered, feel free to reach out to me directly!