May 9, 2018

Best Practices: SBA Financing for Acquiring an ESOP-Owned Business

by Laura P. Amato

SBA loan proceeds are frequently used to finance change of ownership transactions. Such change of ownership can be accomplished through either a stock purchase (or redemption) or through a purchase of all or substantially all of the assets of the seller’s business.1 The SBA Standard Operating Procedure 50 10 5(J) (“SOP”) Subpart B requires that an equity purchase results in a “complete” change of ownership; the purchaser must own 100% of the equity interest of the business at the consummation of the sale. A seller may not remain as an officer, director, stockholder or key employee of the business, other than for a transitional period not to exceed 12 months from the sale date. A special exception to this rule applies where the business to be acquired has set up an employee stock ownership plan (“ESOP”). This article provides an overview of ESOPs and what SBA lenders should consider when financing the change of ownership of a business set up as an ESOP.

An ESOP is a unique type of retirement program that allows participating individuals to purchase stock in their employer’s organization. Business owners can sell all or a portion of their shares of their business to a trust, in order to transfer ownership of the business in a tax-advantageous manner. An ESOP trustee acts as a shareholder representing all ESOP participants as the beneficial owners of their employer’s stock.

An ESOP has become a popular method of creating an “ownership culture” within an organization. According to the National Center for Employee Ownership, there are roughly 7,000 employee stock ownership plans covering about 14 million employees, as of 2017.2 One of the most famous companies with an ESOP is Southwest Airlines, however companies of any size can form an ESOP. Such companies report higher employee retention, greater workplace satisfaction, and increased worker productivity, thus, an ESOP company can be an attractive acquisition target.

Can an employee-owned business be purchased with SBA-guaranteed loan proceeds? The simple answer is “yes”, however lenders should be aware of two unique SBA rules applicable to ESOP companies. First, the SOP requires that a purchaser acquire a controlling interest (at least 51%), rather than 100%, of an ESOP company. Second, the seller of such controlling interest may remain as an owner, officer, director or stockholder of the company. Such seller, however, must provide a guaranty in accordance with SOP Credit Standards. ESOP members – employees who own shares held in the ESOP trust –  are not required to personally guarantee the SBA loan, however any member who holds an ownership interest outside of the ESOP is also subject to the SBA’s personal guaranty requirements (SOP 50 10 5(J) Subpart B, Chapter 4, II.A.5).

1 For an overview of change of ownership rules, see Victor Diaz’s article, Change of Ownership via Stock Purchase: A Primer:

ESOP companies are unique, however Lenders should evaluate ESOP company acquisition financing opportunities in accordance with their usual lending practices. For example, although the SOP only requires a 10% minimum equity injection for a “complete” change of ownership  (SOP 50 10 5(J) Subpart B, Chapter 4, I.C), lenders should consider requiring equity injection even for a partial change of ownership of an ESOP company.

For more information on financing ESOP company acquisitions, please contact Laura Amato at or at 215-390-1061.