SBA & Go Away

What is the SBA rule all about?

The SBA has had a longstanding rule that sellers could not maintain employment as a key employee, officer, director, or manager after 12 months of the sale closing. Previously the emphasis was on the word "key" in key employee and the SBA eventually gave guidance as to what defined key employee status. However, in October of 2023 the SBA changed the language of the rule and removed the word "key" completely.

Now, when an SBA loan is used for a 100% ownership transfer, the seller is only able to provide ongoing transitional consulting on a 1099 contractor basis (which is already not un-common).

How the new rule changes post-sale consulting structure:

  • No More Employee Status for Sellers: Sellers in 100% ownership transfers or asset acquisitions cannot remain as employees post-sale under SBA financing.

  • 1099 Contractor Only: Previously allowed employee options are eliminated. Post-sale consulting agreements must be structured as 1099 independent contractor agreements.

  • SBA Tightens "Key Employee" Rule: The SBA has removed changed "key employee" to "employee" language in its regulations. This is now a stricter no-employee clause pushing all post-sale agreements to be contractor and not employee structures.

  • Selling advisors going forward have different rules about this than selling advisors in the past. This has been a well known and long standing rule so this change may take a while to replace the prior rule's familiarity.

SBA & Stay

For partial book sales, you are still selling 100% of the specific client list being sold. While post-sale consulting (other than introductions) isn't as common for partial book purchases than complete practice buyouts, if you do have a post-sale consulting agreement remember it needs to be on a 1099 contractor basis and not as a employed consultant.

Partial Book Sale:

The buyer purchases a portion of the business assets using an SBA loan. The seller retains ownership of the remaining assets and continues to operate that portion of the business. Over time, the seller can sell additional tranches of the business to the buyer through subsequent SBA loans or other financing methods. This allows the seller to gradually transition out while the buyer gains increasing ownership and management control.

For partial book sales, you are still selling 100% of the specific client list being sold. While post-sale consulting (other than introductions) isn't as common for partial book purchases than complete practice buyouts, if you do have a post-sale consulting agreement remember it needs to be on a 1099 contractor basis and not as a employed consultant.

For partial changes of ownership scenarios where the seller sells part of their book or part of their equity shares the seller 12 month or post-sale employee rule is not applicable.

Partial Equity Sale:

The buyer purchases a portion of the seller's ownership equity using an SBA loan. The seller remains a shareholder and may continue in a key role with or without a defined timeline for full exit.

The seller's ownership percentage decreases over time through predetermined buyouts funded by the buyer (potentially with additional SBA loans).

Example: Sell 81% and keep 19% for now. Being under 20% keeps you off any personal guarantees on the buyer side loan or for future lending needs. Keep your insurance, 19% of the distributions, and sell the rest (at the current value at that time) in whole or in tranches as your timeline unfolds.