Quick Answer: According to the SBA SOP (Standard Operating Procedures), technically, they SHOULD consider a settlement while your business is still open. But in the real world, it hardly ever happens outside of bankruptcy.
Over the years, I’ve had a fair amount of business owners call me after having read the SOPs, emphatic that the SOPs do carve out specific circumstances whereby a business can remain open while writing off a portion of their debt, trying to argue that their situation should qualify. In each case, I explain that in more than one instance, I have seen the SBA make decisions that are in fact contrary to the SOP. And arguing withe SBA? Well, it’s akin to arguing with my 5 year old in the aisle of Toys R Us about why she already has too many toy horses. In other words, it doesn’t matter what I say or how I say it, the person on the other side of the argument will not be swayed!
I have a theory that I have formed during the course of my 8+ years as a workout consultant that explains why the SBA, even when it makes sense to do so, usually won’t. The way they see it, if they start allowing borrowers to settle while allowing them to remain open, it will open the flood gates for every business under the sun to attempt to settle. If you can potentially knock down your debt with no risk, why not try it!
By requiring your business to close, it will ensure you will no longer benefit financially from the business. This ties in with another subject that I have written about often, and clients ask about all the time. In addition to requiring the business to close, banks and the SBA will NOT be agreeable to allowing you to sell the business to a family member or friend with the intention of re-acquiring the business at a later date. As long as the sun rises, there will be guys out there who will tell you that fraudulently representing a sale (they pitch it as “a sophisticated strategy” or “this is how it’s done”), but I will ALWAYS argue that if the SBA were ok with that kind of “strategy”, they wouldn’t make you jump through hoops (i.e. sell to a friend, then buy it back later), and would instead just write down your debt. The old adage that “if it sounds too good to be true, then it probably is” applies here.