26 Jul Selling A Business When You Have An EIDL Loan
If your business took advantage of obtaining an Economic Injury Disaster Loan (EIDL) over the last couple of years, and you are now considering selling your business, one of the issues you need to address early in the process is what happens with that loan. Because EIDL Loans have a term of 30 years, it becomes more likely that your business may still owe money on that loan by the time you think about selling your business. Aside from the fact that the loan needs to be disclosed to any potential buyers during the due diligence phase, you also generally need approval from the SBA well in advance of any sale or transfer. Here I am talking about the actual loan that must be paid back, not any forgivable grant/advance that was given out in much more limited amounts.
When your loan was approved, you signed paperwork, including a promissory note, and that note needs to be reviewed for the terms and conditions, including a due on sale clause and whether the Small Business Administration (SBA) has a lien on any business assets. Loans that were approved for $25,000.00 or more required collateral, which may be real and/or other property of the business such as equipment. In that situation, the SBA also likely filed a UCC-1 lien on those business assets, and that lien would need to be addressed in a sale.
On the seller side, it is best to find out what your obligations and options are before you list your business with a broker, identify a selling price, or enter into any agreements with a potential buyer. You can contact the SBA disaster assistance customer service center at disastercustomerservice@sba.gov to get the process started. A similar process applies if you still have an outstanding and unforgiven PPP (Paycheck Protection Program) loan, except in that case you may need to contact both your bank where you obtained the loan and the SBA.
On the buyer side, you will want to make sure you are asking these questions about loans and reviewing due diligence materials including any payoff letters and documentation the Seller receives from the SBA. Do not skip on this due diligence process – even if the seller is someone you know and trust. Due diligence is an important step in making sure you are clear on what you are buying, understanding the pros and cons of the business, and can factor into your negotiations with the seller.
The last thing you want to do is spend time and money having your business valued, finding a buyer, negotiating terms, agreeing on a price, and then get nearly to the closing table and realize you didn’t go through the steps of going through the SBA. At that point, the deal is delayed at minimum and possibly will fall through with an angry buyer and even a breach of contract case.
As always, it is best to plan ahead, be thorough, and engage partners such as business attorneys and certified public accountants to assist you with the legal and tax ramifications of buying or selling your business.