If you are Selling a Restaurant with an Small Business Association (SBA) loan or Economic Injury Disaster Loan (EIDL), also issued by the SBA, you may think the situation is hopeless. After all, you may owe more than the loan amount and not have the funds to come to the table and satisfy the debt. Thankfully, this Restaurant Broker can show you there is another option. You can go to the SBA and submit an offer in compromise. This is a negotiation between the borrower and lender in which the borrower agrees to pay back a certain amount of the debt owed, but less than the full amount. Keep reading for more information on this process and how it can help you resolve an unpaid loan amount with the SBA.

What is an SBA Offer in Compromise when Selling a Restaurant?

Essentially, you are telling the SBA that you cannot repay the funds you owe and if the offer is accepted, it will be a full and final settlement of the liability and that no further action will be taken. This is critical as it allows for a release of the collateral so the restaurant can be sold free and clear of any encumbrances. Without assurances that the equipment is free from any liens, a buyer is not protected and would in most instances, not move forward. This is critical since many restaurant sellers took advantage of deals for lending during the pandemic. 

Uniform Commercial Code (UCC liens) are filed to show that equipment in the business is under lien or has debt against it. It can make selling a restaurant very difficult unless those liens are released which would occur if the SBA accepts your Offer in Compromise. Here is an article that details the lien process for EIDL, PPP and other SBA loans. 

What are the steps to get an Offer in Compromise Approved when Selling a Restaurant?

The first step is to submit an application with supporting documentation. The SBA will then evaluate the information and make a determination as to whether or not they will accept the offer in compromise. Once an agreement is reached, it is critical that you follow through on your end of the bargain as any defaults could result in legal action.

Gather Information and complete SBA form 1150 - Offer in Compromise. 

You should start by gathering all relevant documentation to support your case with the reasons why an Offer in Compromise is appropriate. This includes a detailed explanation of the reasons why you are unable to repay the loan in full, as well as any financial information or documentation that will support your offer amount. That means that your Certified Restaurant Broker will need to provide you with a copy of the Asset Purchase Agreement which will be written for less than the amount owed on the loan. The asset purchase agreement is the agreed upon contract which demonstrates that the current market value of the restaurant is the amount offered by the buyer and less than the amount owed. 

The SBA will allow for fees to be deducted from any settlement as well. The effort on the part of the restaurant seller should be to negotiate any remaining balance to the lender to zero and no out of pocket at the closing table. 

You must understand that submitting the offer does not afford relief from the obligation sought to be compromised unless and until it is accepted in writing by the Small Business Administration and there has been full compliance with the terms of the offer. 

It is a waiting game to check on the offer and see where it stands though you can reach out by phone to the SBA to track where it stands in the process. At the time of this article, We Sell Restaurants has been seeing these take around 20 - 30 days to resolve. 

Other Requirements - Clarify the terms of your offer directly on the form. 

Tell the SBA what you can do and state this clearly in the space on the form that says, "In full settlement thereof I (we) hereby make the following offer." 

The offer made in item 2 should be clear and concise. Dollar amounts be given first followed by an indication of any concessions anticipated from the Agency (release of lien, etc.). Lump sum payment is the preferred method of concluding a compromise settlement. Special requirements may apply to installment payment settlements (i.e., confess-judgment note, etc.). For those selling a restaurant, this is typically a lump sum payment. We are getting $100,000 for the business. We owe $249,000, we will pay the SBA everything at closing less any fees (brokerage and closing costs or similar) in settlement of this debt. 

Provide justification for your offer

Provide justification for your offer. Provide in Item 3, the basic reasons as to why a compromise settlement is necessary. You should also fill out as an attachment, a reasonably current, complete, sworn statement of income and expenses on SBA Form 770, "Financial Statement of Debtor." You must indicate on the form all transfers and/or acquisitions of real property and major items of personal property since the date the debt to SBA was created. You must also show the names and addresses of transferees, the relationship to obligor (if any) and the type, amount and disposition of any consideration received. 

This is the SBA criteria for elements of a workable compromise offer. 

1. Amount offered bears a reasonable relationship to the net amount recoverable through enforced collection.

2. No fraud or misrepresentation. 

3. Full disclosure of financial capacity of obligor(s) has been made (SBA Form 770, etc.). 

4. Borrower has ceased operations and all business collateral (assets) has been liquidated. 

5. Participating bank, if any, concurs in the action. 

6. Valuations provided for realty mortgaged to SBA or subject to judgment by SBA are supported. 

7. Source of funds for payment of the offer clearly identified 

Fill in the blank that says, "The following facts and reasons are submitted as grounds for acceptance of this offer" with your justification for the offer. 

State that you are telling the truth. That's the quickest way to get into trouble with the government. You must sign a statement saying, "With knowledge of the penalties for false statements provided by 18 United States Code 1001 ($10,000 fine and/or five years imprisonment) and with knowledge that this proposal is submitted to affect action by the Government; I (we) declare that I (we) have examined this offer, including accompanying schedules and statements, and to the best of my (our) knowledge and belief, it is true, correct and complete."

If you are married, both husband and wife must sign the declaration even if only one is liable for the debt. All offerors who are not natural persons (e.g., partnerships, corporations, etc.) must have their offers signed by an authorized individual. The form must also be notarized.

The SBA will review your offer and get back to you with their decision. If they accept your offer, congratulations! You have successfully negotiated a settlement with the SBA. If they reject your offer, they will give you their reasons for doing so and you can decide whether to revise your offer or take some other action.

Keep in mind that the SBA is not required to accept any offer, no matter how low, and that offers are often rejected because they are too low or because the SBA feels that the borrower has not made a good faith effort to repay the loan. If your offer is rejected, you can try again with a higher amount or provide additional information to support your offer. You can also choose to do nothing and let the SBA proceed with collection actions against you.

Whatever you decide to do, make sure you understand the consequences of your actions and get professional help if you need it. Dealing with the SBA is not something to be taken lightly and can have a major impact on your life, both personally and financially.

If you have any questions about this process or need help understanding your options, please contact We Sell Restaurants. We are experts in all things related to restaurants sales. 

Robin Gagnon, Certified Restaurant Broker®, MBA, CBI, CFE is the co-founder of We Sell Restaurants and industry expert in restaurant sales and valuation. Named by Nation’s Restaurant News as one of the “Most Influential Suppliers and Vendors” to the restaurant industry, her articles and expertise appear nationwide in QSR Magazine, Franchising World, Forbes, Yahoo Finance, and BizBuySell. She is the co-author of Appetite for Acquisition, an award-winning book on buying restaurants.