Unpleasant Surprise in Small Biz Acquisitions: The SBA Standby Agreement

An unpleasant surprise that sometimes pops up in the days leading up to closing in small business acquisitions involving SBA financing is the SBA Standby Agreement (also known as SBA Form 155). As a condition of loan approval, some SBA lenders require that the seller execute an SBA Standby Agreement with respect to any seller financing. In essence, the Standby Agreement forbids (or at least restricts) the seller from collecting or enforcing the seller’s promissory note from the buyer except as allowed by the SBA lender. Unfortunately, sellers often learn about the standby requirement at the last minute, after a purchase agreement has been signed and the parties are on the verge of closing the deal. Under those circumstances, a seller may feel pressured into signing the agreement. Alternatively, the seller may refuse to sign the standby agreement and thereby jeopardize the deal, or the seller may negotiate for additional concessions (like a higher down payment) from the buyer as a trade-off for agreeing to sign the Standby Agreement. Buyers and sellers can do several things to avoid this problem. First, not all SBA lenders require standby agreements for seller financing, so buyers can try to find one that won’t require a standby agreement. Second, if the standby agreement is going to be a lender requirement, the seller should be made aware of this fact as soon as possible so the parties have time to address the issue without the pressure of a looming closing date. Contact Perkins Law for help with your small business acquisition questions.