ESOP Acquisitions with SBA Loans: The Complete Guide

Employee Stock Ownership Plans (ESOPs) represent one of the most powerful — and least understood — ways to use SBA 7(a) loans for business acquisitions. The structure is unique: employees acquire ownership through a trust, the seller gets a clean exit (or stays on), and the SBA provides favorable terms that don’t exist for any other type of acquisition.

No equity injection required. The seller can remain. The employees stay on as owners. It’s a structure that works — when you understand the specific SBA rules.

At GoSBA Loans, we help business owners explore ESOP-based acquisitions under the SBA 7(a) program. Here’s exactly how it works under SOP 50 10 8.

Two Ways to Structure an ESOP Acquisition with SBA

The SBA may guarantee a 7(a) loan to an ESOP for two distinct purposes:

Structure 1: Direct ESOP Purchase

An ESOP or equivalent trust directly purchases a controlling interest (at least 51%) in the employer small business. The SBA loan goes to the ESOP, which uses the proceeds to buy the ownership stake.

In this structure:

• The ESOP is the primary borrower
• The small business must be a Co-Borrower on the 7(a) loan
• Transaction costs associated with the purchase may be included in the use of proceeds
• Costs associated with setting up the ESOP trust may not be included

Structure 2: Re-Lending (Employer-to-ESOP)

The small business obtains the SBA 7(a) loan and then re-lends the funds to the ESOP trust. The ESOP uses the re-lent funds to acquire a controlling interest (at least 51%) in the employer business.

In this structure:

• The small business is the primary borrower
• The ESOP receives the funds as a loan from the employer
• Transaction costs associated with making the loan to the ESOP may be included in proceeds
• Costs of setting up the trust may not be included

The re-lending structure is more common in practice because it simplifies the lending relationship — the SBA lender deals with the operating business, not the trust directly.

The Controlling Interest Requirement

Both structures require the ESOP to acquire at least 51% ownership in the employer small business. This is a statutory requirement — not a guideline.

The ESOP can acquire 100%, but the minimum threshold for SBA financing is 51%. If the ESOP is buying less than 51%, it doesn’t qualify for SBA guaranty under the ESOP provisions.

No Equity Injection Required

This is the single biggest advantage of ESOP acquisitions with SBA loans:

Loans to ESOPs for the purpose of purchasing a controlling interest (at least 51%) in the employer small business are not subject to the SBA requirement for equity injection.

Compare this to a standard acquisition requiring 10% of total project costs, or a partner buyout requiring either the 24-month/9:1 test or 10% cash. ESOP acquisitions have no minimum equity injection. This makes 100% financing possible in the right circumstances.

The Seller Can Stay

In a standard complete change of ownership, the seller cannot remain as an officer, director, stockholder, or employee. ESOP acquisitions are different.

The seller may stay on as an owner, officer, director, stockholder, or employee when:

• The purchaser is an ESOP or equivalent trust acquiring a controlling interest (51% or more)
• This applies even when the ESOP acquires 100% ownership

This is a major advantage for succession planning. The founding owner can sell their stake to employees while remaining involved in operations — managing the transition over time rather than abruptly exiting.

When Buying FROM an ESOP

The rule also works in reverse: when an SBA loan is used to purchase a business owned by an ESOP (for a complete change of ownership where the ESOP is being dissolved), the employees of the business — who were the ESOP owners — may remain as employees after the sale. This exception exists because employees shouldn’t lose their jobs simply because the business ownership structure changed.

Guaranty Requirements: Unique ESOP Rules

The IRS prohibits ESOPs from guarantying a loan. The SBA respects this:

• The ESOP is not required to guarantee the loan
• Members of the ESOP are not required to personally guarantee the loan
• All owners who hold an ownership interest outside the ESOP are subject to standard SBA guaranty requirements

Seller Guaranty in Partial ESOP Sales

If the seller remains as a partial owner (ESOP acquires 51-99%), there’s a statutory requirement: the seller must provide a full, unlimited guarantee regardless of ownership percentage. This statutory requirement cannot be waived.

This means even if the seller retains just 5% ownership, they must fully guarantee the SBA loan. It’s more onerous than the standard partial change of ownership rules (which only require a 2-year limited guaranty for selling owners under 20%).

EPC/OC Structure: Not Compatible with ESOP

If an Employee Stock Ownership Plan trust agreement prohibits it from being a guarantor or Co-Borrower, the ESOP cannot use the Eligible Passive Company (EPC) form of borrowing.

For 504 loans with ESOP businesses: the application cannot be structured as an EPC/OC.

This means ESOP transactions must be structured with the operating entity as the borrower, not through a passive holding company.

Compliance Requirements

ESOP compliance is complex, and the SBA relies on the lender to verify it:

Pre-Disbursement

Prior to first disbursement, the lender must obtain documentation that the ESOP or equivalent trust meets the requirements of all applicable IRS, Treasury, and Department of Labor regulations.

Ongoing Compliance

The borrower must certify that the ESOP plan is in compliance with all applicable requirements and will continue to comply with all relevant operating and reporting requirements.

SBA’s Limited Role

SBA will not review any applications — even those submitted via non-delegated processing — for compliance with requirements imposed by other regulatory bodies. This means:

• The lender bears the responsibility for determining whether the ESOP meets legal requirements
• SBA processes the loan under its standard 7(a) rules
• The IRS/Treasury/DOL compliance burden falls entirely on the borrower and lender

Processing Authority

Lenders may process ESOP loans under delegated authority (PLP). There’s no requirement to submit these through non-delegated channels, though the ESOP must be in compliance regardless of processing method.

504 Loan ESOP Rules

CDCs may also make 504 loans to eligible businesses owned or controlled by ESOPs. Key differences from 7(a):

• The ESOP must be in compliance with IRS, Treasury, and DOL requirements (same as 7(a))
• The IRS prohibition on ESOP guarantees applies (SBA doesn’t require ESOP guaranty)
• All owners outside the ESOP are subject to standard guaranty requirements
• The application cannot be structured as an EPC/OC
• 504 ESOP loans are used for fixed assets — the 504 program doesn’t finance changes of ownership in the same way 7(a) does

Transaction Cost Rules

What can be included in the SBA loan proceeds:

• ✅ Transaction costs associated with the purchase of the controlling interest by the ESOP
• ✅ Transaction costs associated with making the loan to the ESOP (re-lending structure)
• ❌ Costs associated with setting up the ESOP trust

ESOP formation costs — legal fees for establishing the trust, plan documents, initial valuations for ESOP establishment — must be funded outside the SBA loan.

When an ESOP Acquisition Makes Sense

• Succession planning: The owner wants to transition ownership to employees gradually
• Seller wants to stay: Unlike standard acquisitions, the seller can remain involved
• Limited buyer equity: No equity injection requirement makes this accessible when cash is tight
• Employee retention: ESOP ownership creates alignment between employee and business interests
• Tax advantages: ESOP structures offer significant tax benefits (consult a tax advisor for specifics)

Common ESOP Acquisition Mistakes

1. Not verifying ESOP compliance before application: The lender must have compliance documentation before disbursement. Start early.
2. Including trust setup costs in the loan: Only purchase transaction costs are eligible.
3. Structuring as EPC/OC: ESOP trusts can’t use this structure.
4. Acquiring less than 51%: The ESOP must get controlling interest for these favorable SBA rules to apply.
5. Assuming the seller doesn’t need to guarantee: If the seller keeps any ownership, they must fully guarantee — no exceptions.
6. Underestimating compliance complexity: IRS, Treasury, and DOL requirements are extensive. Budget for qualified ESOP counsel.

The Bottom Line

ESOP acquisitions with SBA loans offer a combination of benefits — no equity injection, seller continuity, employee ownership — that no other SBA acquisition structure can match. But the compliance requirements are complex, the guaranty rules are unique, and the structure must be precise.

Considering an ESOP-based business acquisition with SBA financing? Contact GoSBA Loans — we’ll help you evaluate whether an ESOP structure works for your situation and guide you through the SBA process.