New Issues with Trade Licenses in SBA Deals (June 2025)

In skilled or specialty trade businesses (e.g., HVAC, electrical, plumbing), licenses often reside with a key employee or the seller. When the buyer isn’t licensed, the seller or a licensed key employee typically must remain involved post-transaction to maintain the company’s license.

Effective June 1, 2025, the Small Business Administration (SBA) changed several rules around business‑sale loans. The new rules in update SOP 50 10 8 complicate the situation for contractors significantly:

• Before:
  
  Sellers or licensed employees could retain a small equity stake in the business without a personal guarantee (PG), allowing the license to stay valid without significant risk to the seller or employee.
  
  
• After (New Rules):
  
  Now, even a small retained equity stake triggers a mandatory PG. Most license holders will be reluctant to guarantee an SBA loan for a business they no longer fully control.
  
  

Why This Matters

Without a licensed professional tied to the business in a meaningful way (i.e. equity), SBA-funded transactions become difficult because the license transfer or continuity of the license is usually required for financing.

• Banks (and the SBA) want assurance the business maintains licensing compliance post-sale.
  
  
• Buyers without licensing credentials rely on licensed sellers/employees to retain some equity, which is significantly more challenging due to the recent changes including a personal guarantee.
  
  

How Alternative Equity Could Help

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Alternative equity incentives are uniquely positioned here because:

• No Personal Guarantee Required:
  
  License holders (sellers/employees) can receive alternative equity (i.e. phantom stock) without triggering SBA-mandated personal guarantee requirements because it’s a cash-based incentive and not actual equity.
  
  
• License Continuity Through Employment or Contract:
  
  Instead of maintaining a small actual equity stake, the licensed individual remains as an employee or stays involved as a contractor and receives phantom stock tied to business performance, ensuring compliance without the PG exposure.
  
  
• Flexible Alignment of Incentives:
  
  Phantom equity aligns the licensee’s interests financially with the company without the headaches of traditional equity.

Practical Example in Trades

• Old way:
  
  Seller rolls 5–10% in traditional equity post-transaction, personally guaranteeing SBA loan under new rules.
  
  
• New way (with phantom equity):
  
  Seller fully exits real equity position (no PG). Seller stays involved via employment or consulting agreement with a phantom stock award aligning them financially to performance and license continuity.
  
  

Ideal Outcome with Phantom Equity

• SBA compliance is maintained—no personal guarantees for non-owners.
  
  
• License stays valid, allowing the buyer to operate the business.
  
  
• License holder incentivized economically without unwanted PG risk.