Why Legal Due Diligence Is Critical in SBA Business Acquisitions
Buying a business with an SBA loan is one of the most significant financial decisions you’ll ever make. While the financial analysis — revenue, cash flow, valuation multiples — gets most of the attention, it’s the legal aspects of the transaction that can make or break your deal.
Get the legal side wrong, and you could inherit hidden liabilities, lose key employees, face landlord disputes, or find yourself locked out of the very business you just purchased. Get it right, and you’ll have ironclad protections that safeguard your investment for years to come.
This comprehensive guide covers every major legal consideration you need to understand when buying a business with SBA financing — from the purchase agreement to post-closing protections.
The Asset Purchase Agreement: The Foundation of Your Deal
In most SBA-financed acquisitions, you’ll be completing an asset purchase rather than a stock purchase. This means you’re buying the business’s assets — equipment, inventory, customer lists, intellectual property, goodwill — rather than buying the company’s shares. The document governing this transaction is the Asset Purchase Agreement (APA).
Key Components of an Asset Purchase Agreement
A well-drafted APA should include the following elements:
- Identification of assets being purchased: A detailed list of every asset included in the sale — tangible (equipment, inventory, vehicles) and intangible (trademarks, customer lists, domain names, phone numbers)
- Excluded assets: Equally important — what’s NOT included. The seller may retain certain personal property, specific accounts receivable, or cash on hand
- Purchase price and allocation: The total price and how it’s allocated among different asset categories (equipment, goodwill, inventory, covenant not to compete). This allocation has significant tax implications for both parties
- Payment terms: How the purchase price will be paid — SBA loan proceeds, seller financing (if any), buyer’s equity injection, and any earnout provisions
- Closing conditions: What must happen before the deal closes — SBA loan approval, landlord consent, license transfers, etc.
- Transition provisions: Seller’s obligations to assist with the transition, including training periods, customer introductions, and vendor relationship transfers
Why Asset Allocation Matters
The way you allocate the purchase price among asset categories affects your taxes for years. Here’s a simplified overview:
- Equipment and furniture: Can be depreciated over 5-7 years (or potentially expensed in year one under Section 179)
- Inventory: Deducted as cost of goods sold when items are sold
- Covenant not to compete: Amortized over the life of the agreement (typically 2-5 years)
- Goodwill: Amortized over 15 years
Buyers generally want more allocated to categories with faster depreciation/amortization schedules. Sellers often have the opposite preference. Your attorney and CPA should work together to negotiate an allocation that serves your interests while remaining defensible to the IRS.
Non-Compete and Non-Solicitation Agreements
Perhaps no legal provision is more important to business buyers than the non-compete agreement. Without one, you could pay hundreds of thousands of dollars for a business only to have the seller open a competing shop across the street.
Elements of an Enforceable Non-Compete
Non-compete agreements must be reasonable to be enforceable. Courts evaluate them based on three factors:
- Duration: How long the restriction lasts. In the context of a business sale, 3-5 years is typical and generally enforceable. Some go as long as 7 years.
- Geographic scope: The area where the seller is prohibited from competing. This should match the business’s actual market area — a 50-mile radius for a local service business, statewide or nationwide for businesses with broader reach.
- Activity restriction: What specifically the seller cannot do. This should be tailored to the business being sold — not so broad that it prevents the seller from earning any living, but broad enough to prevent meaningful competition.
Non-Solicitation Provisions
Separate from the non-compete, a non-solicitation agreement prevents the seller from:
- Soliciting customers: The seller cannot contact or attempt to win business from the customers you just purchased
- Soliciting employees: The seller cannot recruit or hire away employees who stayed with the business after the sale
- Soliciting vendors: In some cases, preventing the seller from establishing competing relationships with key suppliers
SBA lender requirement: Most SBA lenders require a non-compete agreement as a condition of loan approval. If the seller refuses to sign one, it’s a major red flag — and may kill your financing.
Lease Assignment and Landlord Approval
For businesses operating from leased premises, the commercial lease is often the most critical legal document after the purchase agreement itself. If the business can’t stay in its current location, the entire deal may fall apart.
Key Lease Considerations
- Assignment clause: Does the current lease allow assignment to a new owner? Most commercial leases require landlord consent for assignment, and some prohibit it entirely.
- Remaining lease term: SBA lenders typically want to see a lease term (including renewal options) that matches or exceeds the loan term. If the lease expires in 3 years and the loan term is 10 years, you’ll need to negotiate an extension.
- Personal guarantee: Landlords will likely require you to personally guarantee the lease, even if the business is structured as an LLC or corporation.
- Rent increases: Review any scheduled rent increases and compare them to market rates. Unfavorable escalation clauses can significantly impact your cash flow projections.
- Use restrictions: Ensure the lease allows you to operate the business as intended. Some leases have specific use restrictions that could limit your plans.
When Landlords Have Leverage
In strong real estate markets, landlords may view a business sale as an opportunity to renegotiate terms. They might:
- Demand higher rent as a condition of consenting to the assignment
- Require a new lease rather than an assignment (eliminating favorable legacy terms)
- Request additional security deposits
- Impose new restrictions or conditions
Start the landlord conversation early in the process. Discovering a landlord problem after you’ve invested thousands in due diligence is painful and expensive.
Representations and Warranties
The representations and warranties section of your purchase agreement is your primary legal protection against hidden problems. These are statements the seller makes about the condition of the business that, if untrue, give you legal recourse.
Essential Seller Representations
Your purchase agreement should require the seller to represent and warrant that:
- Financial statements are accurate: The financial information provided during due diligence is true, complete, and fairly represents the business’s financial condition
- No undisclosed liabilities: There are no debts, obligations, or claims against the business that haven’t been disclosed
- Tax compliance: All tax returns have been filed and all taxes have been paid
- Legal compliance: The business complies with all applicable laws, regulations, and licensing requirements
- Employee matters: All employee-related obligations (wages, benefits, workers’ comp) are current
- Contract status: All material contracts are in good standing and assignable
- No pending litigation: There are no lawsuits, claims, or regulatory actions pending or threatened
- Environmental compliance: The business property is free of environmental contamination (particularly important for manufacturing, auto repair, dry cleaning, and similar businesses)
- Intellectual property ownership: The seller actually owns the trademarks, trade names, and other IP being transferred
Survival Period
Representations and warranties should “survive” the closing for a specified period — typically 12-24 months. This means if you discover a misrepresentation after closing, you still have legal recourse against the seller during the survival period.
Escrow and Holdback Provisions
Smart buyers don’t hand over 100% of the purchase price at closing. Escrow and holdback provisions keep a portion of the funds in reserve to protect against post-closing problems.
How Escrow Works in Business Acquisitions
A percentage of the purchase price (typically 5-15%) is deposited into an escrow account managed by a neutral third party. These funds are released to the seller after a specified period (usually 6-18 months) provided no claims have been made under the representations and warranties.
Common Holdback Scenarios
- Indemnification holdback: Protects against breaches of representations and warranties
- Revenue holdback: Released when the business meets certain revenue targets post-closing, protecting against seller misrepresentation of earnings
- Transition holdback: Ensures the seller fulfills their training and transition obligations
- Customer retention holdback: Released when key customer relationships are successfully transferred
Earnout Provisions
In some deals, a portion of the purchase price is structured as an earnout — additional payments made to the seller if the business meets certain performance targets after closing. Earnouts can bridge valuation gaps when buyer and seller disagree on what the business is worth, but they require careful legal drafting to avoid disputes.
Licenses, Permits, and Regulatory Approvals
Many businesses require specific licenses and permits to operate. In an asset purchase, these licenses typically do not transfer to the buyer — you’ll need to apply for new ones.
Common License and Permit Issues
- Professional licenses: Businesses in regulated industries (healthcare, legal, accounting, real estate) require the owner to hold appropriate professional licenses
- Business licenses: City and county business licenses need to be transferred or reissued
- Health permits: Restaurants, food service, and healthcare businesses need health department approvals
- Liquor licenses: These can take months to transfer and may require separate approval processes
- Franchise agreements: If the business is a franchise, the franchisor must approve the new owner
- Industry-specific permits: Environmental permits, building permits, zoning approvals, and similar regulatory requirements
Start the licensing process as early as possible. Some licenses take weeks or months to process, and you can’t legally operate without them.
SBA-Specific Legal Requirements
SBA loans come with their own set of legal requirements that your attorney must understand:
SBA Loan Authorization Requirements
- Personal guarantee: All owners with 20% or more equity must personally guarantee the SBA loan
- Life insurance: The SBA may require the buyer to obtain life insurance with the lender as beneficiary
- Standby agreements: Any seller financing must be on “full standby” — meaning the seller note payments are subordinated to the SBA loan payments
- Collateral requirements: The SBA requires the lender to collateralize the loan to the maximum extent possible, which may include personal assets
- Change of ownership restrictions: You generally cannot sell or transfer ownership of the business without SBA approval during the loan term
SBA Closing Documentation
In addition to the standard purchase agreement, SBA transactions require specific documents:
- SBA Form 1919 (Borrower Information Form)
- SBA Form 159 (Fee Disclosure and Compensation Agreement)
- IRS Form 4506-C (Request for Transcript of Tax Return)
- Business plan and financial projections
- Environmental questionnaire
Why You Need an Attorney Experienced in SBA Transactions
This is not the time to use your family lawyer or a general practice attorney. SBA business acquisitions involve a unique intersection of:
- Business law
- Commercial lending regulations
- SBA Standard Operating Procedures (SOPs)
- Tax law
- Real estate law (if the deal includes property)
- Employment law
An attorney who doesn’t understand SBA-specific requirements can cause costly delays, kill your deal entirely, or leave you exposed to risks that could have been mitigated.
What to Look for in an SBA Transaction Attorney
- Specific experience with SBA 7(a) loan closings
- Understanding of SBA Standard Operating Procedures
- Relationships with SBA lenders and CDC/504 programs
- Experience with asset purchase agreements in your industry
- Ability to coordinate with your SBA lender’s legal team
How GoSBA Supports the Legal Side of Your Acquisition
At GoSBA, we’ve facilitated hundreds of SBA-financed acquisitions and understand the legal complexities inside and out. While we’re not a law firm and don’t provide legal advice, we support the legal process in several critical ways:
- 50+ lender network: We match you with lenders whose legal teams are experienced in your type of transaction, minimizing delays and complications
- $320M+ funded in 2025: Our experience means we can identify potential legal issues early, before they derail your deal
- Free business plan and financial projections: Our professionally prepared plans (valued at $2,500-$5,000) satisfy SBA documentation requirements and give your attorney a clear picture of the deal structure
- 100% free service: GoSBA never charges borrowers — our lenders compensate us at closing, so you can invest your resources in quality legal representation
- Attorney referral network: We can connect you with attorneys who specialize in SBA transactions in your area
Protect Your Investment — Start With the Right Team
The legal aspects of buying a business with an SBA loan are complex, but they’re manageable when you have experienced professionals guiding you through the process. The key is assembling the right team early: an experienced SBA transaction attorney, a knowledgeable CPA, and a lending partner who’s been through hundreds of these deals.
GoSBA is that lending partner. We’ll help you navigate every step of the acquisition process — from initial pre-qualification through closing — and ensure the legal, financial, and operational pieces all come together.
Contact GoSBA today for a free consultation and let us help you buy your next business with confidence and the right legal protections in place.
