The Main Street Employee Ownership Act (the “Act”) was signed into law on August 13, 2018 as part of the John McCain National Defense Authorization Act as a federal initiative to aid in ownership transition of small businesses. The issue of exit strategies and succession planning for small business owners has become increasingly important as baby boomers, who own almost half of the privately-held businesses in the U.S., near retirement age. Access to capital and technical transitory assistance is necessary to avoid small business closures and loss of jobs.
The Act enables the Small Business Administration (SBA) to better assist small business owners to continue their legacies through shifting to employee ownership through Employee Stock Ownership Plans (ESOPs). Prior to the bill, SBA lending rules allowed for ESOP loans but requirements were burdensome and were not aligned with commercial ESOP lending practices. For instance, the bill now allows for the SBA to provide “back-to-back” loans where the initial loan is made to the company which in turn is loaned to the ESOP trust to purchase ownership shares of the company. This lending practice is customary with commercial loans, but historically the SBA could only loan money to the ESOP plan within the company. Furthermore, the bill clarifies that SBA loans may be made under the Preferred Lender Programs allowing for a more streamline loan application process and accelerated approval.
Other highlights of the bill which aide in ownership transition are the ability of the seller to remain with the company in a meaningful role when an ESOP acquires a controlling interest, the allowance of the SBA loan to finance transaction costs, and the authority of the SBA to waive equity requirements on a case-by-case basis.
In addition to the enhanced access to SBA loans by ESOPs, the bill also makes capital more accessible to cooperative business structures.
Other SBA Loan Changes in 2018
- Equity Requirement: For loans involving single-use properties, such as gas stations, hotels, car washes, etc., a 15% down payment is required by the borrower for the 1st SBA loan project with subsequent projects requiring 20% down. For loans other than ones involving single use properties, the required down payment is a little as 10%.
- Loan to Value (LTV) Requirements: SBA increased the threshold for an acceptable minimum appraised value from 90% to 95% of estimated value without requiring a reduction in the debenture.
- Franchise Eligibility: The SBA has created a Franchise Directory which includes all franchise and other brands now deemed eligible for SBA assistance.
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|Nick Sypniewski||Lori Wilhelmy||Amber Widener|