Partial Change of Ownership with SBA Loans: What You Must Know

Not every ownership transition is a full buyout. Sometimes a new partner is buying in, a departing owner is selling part of their stake, or treasury stock is being redeemed. The SBA calls these “partial changes of ownership” — and they come with a unique, often misunderstood set of rules.

At GoSBA Loans, we see partial ownership changes get derailed by avoidable mistakes more than almost any other deal type. The co-borrower rules, guaranty requirements, and structural prohibitions are strict. Here’s exactly how it works under SOP 50 10 8.

What Qualifies as a Partial Change of Ownership

A partial change of ownership occurs when loan proceeds are used to fund:

• The purchase of all or a portion of one or more owner’s interest in the business
• The purchase of the business itself (e.g., purchase of treasury stock)
• At least one of the original owners remains as an owner after the sale

This covers scenarios like:

• A new partner buying a 30% stake from an existing owner
• An existing 60% owner buying out a 40% partner but keeping 100% ownership (this is actually a complete partner buyout, not partial)
• A new investor acquiring a minority interest
• The company redeeming some but not all of an owner’s shares

The key distinction: if at least one original owner stays and a new owner is joining, it’s a partial change of ownership with additional requirements.

Co-Borrower Requirements: The Strictest Rules in SBA Lending

This is where partial changes of ownership get complicated — and where most deals stumble.

Both of the following must be Co-Borrowers on the new SBA loan:

1. The Operating Company
2. Any new direct and/or indirect owner (including individuals and entities) who is acquiring any direct and/or indirect ownership interest in the Operating Company

This applies regardless of the percentage of ownership being acquired. The SOP gives an explicit example: a person gaining just 1% direct and/or indirect ownership must be a Co-Borrower.

Why This Matters

Being a Co-Borrower means:

• You’re jointly and severally liable for the entire loan
• For Standard 7(a) loans, in a collateral shortfall, all Borrowers and Co-Borrowers must provide their assets
• You’re on the Note — this is a real obligation, not just a signature on a guaranty

This can be a dealbreaker for minority investors who want limited exposure. There’s no workaround — if they’re becoming an owner, they’re a Co-Borrower.

The Multi-Step Prohibition: A Critical Rule

The SBA explicitly prohibits multi-step partial changes of ownership. Here’s what that means:

A multi-step partial change of ownership occurs when the ownership change is structured so that:

• Some or all of the existing owners are bringing on a new owner(s)
• They do this via the formation of a new entity that will become the 100% owner of the Operating Company
• Some or all of the existing owners and the new owner(s) become owners of the new entity

This structure is ineligible for SBA financing.

In practice, this means you cannot create a holding company, have both old and new partners contribute to it, and have it acquire the Operating Company. The SBA sees this as a circumvention of its co-borrower and guaranty requirements.

Example of a Prohibited Structure

Owner A (60%) and Owner B (40%) want to bring in New Partner C. They form NewCo LLC, where A gets 50%, B gets 30%, and C gets 20%. NewCo then acquires 100% of the Operating Company. This is prohibited.

What You Can Do Instead

Structure the deal as a direct partial ownership transfer within the existing entity. New Partner C buys a 20% interest directly in the Operating Company, with Owner B selling down. Both the Operating Company and C are Co-Borrowers on the SBA loan.

Selling Owner Guaranty: The 2-Year Requirement

When a selling owner remains as a direct or indirect owner after the sale but owns less than 20% post-sale, special guaranty rules apply:

• The selling owner must provide a guaranty for the full loan amount
• The term of the guaranty must be for the later of:
  • A period of at least 2 years after final loan disbursement, or
  • Until the loan has been current for 12 consecutive months (making payments per the note terms, not on deferral)
• SBA does not require these 2-year guarantors to provide their assets in case of collateral shortfall

This is a unique provision. Normally, owners under 20% aren’t required to guarantee SBA loans. But in a partial change of ownership, if they’re selling and remaining, they must guarantee — it’s the SBA’s way of ensuring the seller has skin in the game during the transition period.

All Other Guaranty Requirements

Beyond the selling owner rule:

• All remaining owners are subject to standard SBA guaranty requirements
• Guaranty percentages for remaining owners are based on post-sale ownership percentages
• For ESOP transactions: if the seller remains as a partial owner, they must provide a full, unlimited guarantee regardless of ownership percentage — this is a statutory requirement that cannot be waived

EPC/OC Structure: Important Restrictions

If the business is structured as an Eligible Passive Company (EPC) with an Operating Company (OC):

• 7(a) loans may not fund a partial change of ownership in the EPC
• 7(a) loans may fund a partial change of ownership in the Operating Company of an EPC/OC structure

This restriction comes directly from 13 CFR § 120.111. The EPC is designed to hold passive assets (real estate) and lease them to the OC. Partial ownership changes must happen at the operating level.

Equity Injection for Partial Changes of Ownership

Partial changes of ownership have a different equity injection framework than complete changes:

• The business balance sheets for the most recent completed fiscal year and current quarter must reflect a debt-to-worth ratio of no greater than 9:1 prior to the change in ownership
• If the ratio exceeds 9:1, the new and/or existing owners must contribute cash — the lesser of:
  • Enough to bring the ratio to 9:1 or below, or
  • At least 10% of the purchase price

Note there’s no 24-month active participation certification for partial changes — that’s a partner buyout rule only.

The Seller Can Stay

Unlike complete changes of ownership, in a partial change of ownership the seller may stay on as an owner, officer, director, stockholder, Key Employee, or employee of the business. This is one of the key advantages of structuring a deal as partial rather than complete.

Additionally, when an ESOP is buying a business and the employees (who own the ESOP) remain as employees, that’s permitted.

Documentation Requirements

For any partial change of ownership, the lender’s file must include:

1. Current business valuation (not including real estate) meeting SBA requirements
2. Real estate appraisal (if commercial real estate is involved)
3. Analysis showing the change promotes sound development or preserves the business
4. Purchase agreements
5. Evidence all conveyed assets are properly secured as collateral
6. Balance sheets demonstrating the 9:1 debt-to-worth ratio (or equity contribution plan)
7. IRS transcripts to verify seller financial data
8. Standby agreements (if seller financing is used as equity)

Common Partial Change of Ownership Mistakes

1. Forgetting the 1% Co-Borrower rule: Even a tiny new ownership stake triggers the Co-Borrower requirement. No exceptions.
2. Attempting a multi-step structure: Creating a new entity to bring in partners is explicitly prohibited.
3. Ignoring the selling owner guaranty: Sellers who retain less than 20% still must guarantee for 2 years. Both parties need to know this upfront.
4. Trying to partially change ownership in the EPC: Partial changes in an EPC are ineligible. It must happen at the OC level.
5. Not checking the debt-to-worth ratio early: A ratio above 9:1 triggers equity injection requirements that can change the economics of the deal.
6. Structuring as partial to avoid complete change of ownership rules: The SBA will look through the substance of the deal. If it’s effectively a complete change of ownership structured in steps, it won’t fly.

Partial vs. Complete: Strategic Considerations

The Bottom Line

Partial changes of ownership offer flexibility — the seller can stay, the business maintains continuity, and the equity injection requirements can be more favorable. But the co-borrower requirements are among the strictest in SBA lending, and the multi-step prohibition eliminates creative structuring.

Bringing on a new partner or restructuring ownership with SBA financing? Contact GoSBA Loans — we’ll structure the deal within SBA rules and avoid the pitfalls that kill partial change of ownership transactions.