The Personal Guarantee Rule That Surprises Every Partial Buyout
This post is for informational purposes only. I am not an attorney or your accountant, and every transaction is different. Consult your own advisors for your specific situation. SBA program parameters referenced here are current as of July 13, 2026 and are subject to change.
Almost every week, a buyer calls me with the same structure. They are buying out one of two partners in a business, or bringing in a passive investor to help fund the deal, and they want to know how an SBA 7(a) loan would work. It is a fair question. The problem is what happens once they receive the first SBA term sheet: the SBA rules on partial changes of ownership now require every equity holder to personally guarantee the loan (with a few exceptions), regardless of how small their stake is. That is the piece that surprises people, and it is the piece that most often kills an otherwise clean deal.
What the Rule Actually Says
On a full change of ownership (a buyer purchasing 100% of a business), the SBA's personal guarantee rule is well understood. Any owner of 20% or more personally guarantees the loan. Owners under 20% are not required to guarantee the loan under the SBA rules, unless the lender requires it. Most first-time buyers plan around that 20% threshold when they bring in investors.
Partial changes of ownership work differently. Under the SOP updated in June 2025, when an SBA 7(a) loan finances a partial buyout, the seller staying in the business, the buyer, and every other equity holder must personally guarantee the loan. The 20% floor does not apply. Any 5% passive investor is on the hook for the entire loan balance, jointly and severally, for the entire term of the loan, a minimum of two years.
The seller who retains equity must also sign a personal guarantee. The length of that guarantee varies depending on how much equity the seller retains. If the seller retains less than 20% equity, then the personal guarantee is on the full loan amount but is limited to a term of 2 years. So long as the loan is kept current for the 12 months leading up to the 2-year date, the seller's personal guarantee disappears after 2 years. If the seller retains 20% or more of the equity, the seller is required to sign a full personal guarantee on the entire loan amount for the life of the loan. That is a full guarantee that has the same collateral requirements as any traditional SBA guarantee, which could cause the seller's home to be tied up as collateral on the loan.
There is one exception to these rules. If there is a minority owner in the business who owns less than 20% of the equity and that owner stays in the business and does not receive any proceeds from the sale of the business, then that individual is not required to guarantee the loan. But if that equity holder receives even one dollar of loan proceeds, they are then required to guarantee the loan for two years. This carve-out does not apply to owners who retain 20% or more equity, as they fall under a different rule and must sign a full personal guarantee no matter what.
| Structure | Who Must Personally Guarantee | Duration |
|---|---|---|
| Full change of ownership (100%) | Every owner of 20% or more | Life of the SBA loan |
| Partial change of ownership | Just about every equity holder, including investors under 20% and a seller retaining 20% or more equity | Full Guarantee, minimum 2 years, then reassessed |
| Partial change of ownership | Seller retaining less than 20% equity but receiving proceeds | Full Guarantee limited to 2 years |
| Partial change of ownership | Seller retaining less than 20% equity but receiving no proceeds from the sale | No Guarantee required |
| Investor takes 20%+ on full acquisition | That investor, personally | Life of the SBA loan |
| Investor takes under 20% on full acquisition | Not required by SBA, though the lender may still ask | N/A unless lender-imposed |
The reason is straightforward from the SBA's perspective. In a partial buyout, the business, its existing debts, and its historical liabilities all continue. The people staying in the business are the ones most positioned to protect the collateral. The SBA wants them all on the note.
Who This Catches
It is not the sophisticated private equity buyer who gets caught by this rule. They read the SOP before they issue a letter of intent. The people who get caught are almost always one of three profiles, and I see all three regularly.
| Buyer Profile | The Assumption That Fails | What Actually Happens |
|---|---|---|
| Buyer bringing in a passive investor at 10% to help fund the down payment | Under 20% means no personal guarantee, same as a full acquisition | Because it is a partial buyout structure, the 10% investor must personally guarantee the entire loan for two years |
| Buyer purchasing 60% of the business, leaving the seller with 40% | The seller is just retaining rollover equity, they are not on the loan | The seller staying in must personally guarantee the SBA loan alongside the buyer |
| Two partners buying out a third | The exiting partner is out of the business, so no one else's exposure changes | Both remaining partners personally guarantee the full loan; if either had a spouse on the old note, that person's release has to be papered |
Of the partial buyout deals CLX reviews where the buyer or one of the equity holders had not been told the personal guarantee applied to them. Most learn about it after LOI, when restructuring is expensive.
CLX deal intake observations, 2025-2026
“The rule is not new to lenders. It is new to almost every buyer I talk to. And it is the single most common reason a partial buyout that made sense on paper falls apart at commitment.”
Structures That Still Work
None of this means partial buyouts are dead. It means the structure has to be planned around the guarantee requirements. Here is how our team most commonly restructures these deals so they close.
Convert the partial buyout to a full change of ownership
If the seller staying in was going to hold under 20% anyway, negotiate a full 100% purchase with a seller note. The seller is off the guarantee; the standard 20% investor rule applies again, where the investor does not need to guarantee the loan.
Structure investor capital as debt, not equity
A subordinated investor note on standby, priced accordingly, keeps the investor off the ownership table and therefore off the guarantee. Talk to your accountant about the tax treatment before you commit. However, you can no longer use this capital as part of your required Borrower equity, so you would need to satisfy equity requirements from other sources.
Time the equity infusion for after the two-year window
The two-year minimum applies to guarantees in force at closing. Investors who come in later, through a separate transaction, are governed by the standard 20% rule. This has to be arm's length; do not paper a sham transaction.
Raise the investor's stake to 20%+ and accept the guarantee
For strategic investors who were always going to sign anyway, moving them above 20% simplifies the structure and gets the same result on the guarantee side while giving them a meaningful position.
Use a forgivable seller note to provide post-closing earnings to the seller based on performance
If the seller's goal was to receive part of the upside by retaining equity, you cannot do a traditional earn-out with SBA financing. However, you can put in place a forgivable seller note tied to performance of the business that keeps the seller off the cap table and off the guarantee. That forgivable seller note needs to have a maximum note amount and a repayment structure that works with the cash flow of the business. The buyer takes 100% equity under this scenario; the seller gets paid over time on results.
Seller retains less than 20% of the equity
Sometimes the seller needs to retain ownership in the business for licensing reasons. If you keep the seller's ownership below 20%, then the seller's guarantee is limited to two years. One way we have helped get sellers comfortable with the two-year guarantee is by letting them know they just need to work with the buyer to keep the loan current for the first two years, and then after those two years their guarantee automatically expires. So it is really only two years of payments they are on the hook for if they work closely with the buyer.
| Restructure | Best When | Trade-off |
|---|---|---|
| Full buyout with a seller note | The seller wanted a stake mainly for continued income | Larger seller note; seller may want price or rate concessions |
| Investor as subordinated debt | The investor is passive and wants a return, not control | Higher interest cost on the investor tranche; tax treatment differs |
| Investor moved to 20%+ position | The investor was strategic and comfortable signing | Buyer gives up more equity than originally planned |
| Forgivable seller note in place of rollover equity | The seller's motivation was upside on future performance | Payment obligation over 3 to 10 years must fit inside global cash flow |
What the Guarantee Actually Means for the Investor
A personal guarantee on an SBA loan is not a formality. It is a joint and several obligation for the full loan balance. If the business defaults, the lender can pursue any guarantor for the entire remaining balance, not just their proportional share. The standard SBA guarantee runs the life of the SBA loan; however, for sellers retaining equity below 20% on a partial business acquisition, the guarantee is limited to two years. Two years is the minimum; many lenders keep the guarantees in place longer if the business's financial performance warrants it.
Every guarantor is on the hook for the entire loan balance, not a proportional share. A 5% investor and the majority owner have the same legal exposure to the lender.
Most passive investors are not prepared for that exposure, and honestly, most of them should not be. Which is exactly why so many of these deals need to be restructured before the investor sees the guarantee paperwork. It is far easier to have that conversation while the LOI is still being negotiated than the week before closing.
“If your investor would not sign a personal guarantee for the whole loan, they are not really an equity partner in an SBA-financed deal. They are a debt investor. Structure them that way from the start.”
The Bottom Line
Partial buyouts were among the most common structures our team saw prior to the guarantee rule changes in 2025, and now they are much rarer. However, we still see clients trying to get them done under the old rules, and they are the transactions most often structured wrong before the LOI is signed. The rule itself is not complicated. It just does not match what most buyers expect from the 20% threshold they have heard about elsewhere. Get the guarantee analysis done before you commit to a structure, not after.
If you are working on a partial buyout and want a second set of eyes on the structure before you LOI, our team is happy to review it at no cost. You can reach us at info@commerciallendingx.com or 888-975-0007.
Brad Hettich, President / Commercial Lending X
Watch: The $10 Million Question
Another rule change has been generating just as many questions this month, so we filmed an answer. In this video I break down the SBA change that took effect on July 4th: the cumulative loan cap doubled to $10 million. I explain what actually changed, what did not, and which buyers it helps.
New video from Brad Hettich, President of Commercial Lending X
Brad Hettich
President, Commercial Lending X
~30 years in commercial banking. Originated close to $1.4 billion, underwritten $2.5 billion+. Brad writes about SBA lending, deal structuring, and commercial credit markets from the perspective of someone who has been on both sides of the desk.
View full bio →Related Transactions
Recent deals related to this topic.
Partial buyout of a services firm restructured as a full acquisition with a 15% seller standby note after the retained-equity guarantee issue was identified at LOI.
Two-partner buyout of a third; both remaining partners signed personal guarantees for the full loan balance, structure priced accordingly.