Upcoming event

I'm moderating a panel called "So You Bought a Business, Now What?" at the Rice Business Acquisition and Entrepreneurship Conference on October 16th. If you're going, find me. I want to hear what your deal looks like on the other side of October 1st.

Missed the webinar?

Chris Barrett of Midwest CPA and I ran a session on the new SBA guidelines. 132 of you showed up live. The recording is here.​

Does Your Spouse Have to Sign?

Picture a buyer three weeks from closing.

The business is solid, the coverage ratio clears with room, the seller note is agreed. Then the closing checklist arrives and there is a signature line with a name on it that has never been on a single call: the buyer's spouse.

I get some version of that call every week, and last week I got five. One buyer asked before we'd even discussed his own liquidity. One wanted to know whether her husband's salary could help her coverage ratio.

One volunteered his wife as a co-signer before I'd said a word about it. And a three partner group with a term sheet in hand got a note from a second bank saying it would probably need spousal guarantees to get to approval.

Nothing in SBA lending produces more confusion, or more tension at a kitchen table, than this one signature. So I went back through SOP 50 10 8.1, the version that governs every loan numbered on or after October 1st, and pulled out every sentence that touches a spouse. Then I laid that against what banks actually do.

The SBA requires a spouse's signature in exactly two situations, and neither is the one most buyers fear. The one they fear, a full guarantee from a spouse who owns nothing, comes from a different place, and once you understand where, you can usually see it coming.

First, the bank is allowed to ask

Buyers sometimes push back with "isn't it illegal to ask about my spouse?" It is a fair instinct. Under the Equal Credit Opportunity Act a lender generally cannot ask about your marital status or your spouse's finances. The SOP addresses this head on in its first chapter: SBA lending programs are "Special-Purpose Credit Programs" under ECOA, which means the lender may consider your spouse's financial resources and may obtain your spouse's signature, owner or not, when it's needed for a valid lien or "for other reasons to protect SBA and SBA Lender interests."

So the question is never whether the bank can ask. It's which of three doors the ask is coming through.

Door 1: the household owns 20% or more

The guarantee rules live in Section A, Chapter 5, Paragraph A. The core rule carried over unchanged from the current SOP: anyone with direct or indirect ownership of 20% or more gives an unlimited full guarantee. Below 20% on a complete change of ownership, the SBA does not require one.

The SOP then adds spouses and minor children together for that test:

Consider a hypothetical couple who take 15% and 10% of the acquiring entity because their accountant liked the look of it. Neither is at 20% on paper. The household is at 25%, so both sign unlimited guarantees. The split saved nothing and added a signature, and the lender has to enter the combined percentage into the SBA loan system that way.

The household lens shows up in two other places most buyers never connect to the guarantee question. When the bank documents that credit isn't available elsewhere, the SOP requires it to consider the liquidity of 20% owners and their spouses and minor children. And the personal financial statement a 20% owner submits has to include the spouse's assets. Your spouse's balance sheet is in the file whether or not your spouse ever signs a guarantee.

Door 2: the house is the collateral

Most acquisition loans are goodwill heavy and light on hard assets, so most of them have a collateral shortfall. Appendix 19 tells the lender what to do about it: take available equity in personal real estate owned by 20% owners and guarantors, personal residence included, with the lien limited to the shortfall and to 150% of the equity in the property.

Real estate with less than 25% equity doesn't have to be pledged, and two-year guarantors on a partial change of ownership are exempt from pledging their homes.

If you own your home with your spouse, the bank cannot perfect a lien without your spouse's signature. So the SOP requires it, and it is careful about what that signature means:

The exposure is capped at the spouse's share of the pledged asset. Your spouse is signing the mortgage, and the guarantee that rides along with it stops at the house. The SOP is so specific about this that its definitions section says a non-owner spouse signing for jointly held real estate isn't even a "Supplemental Guarantor," because that signature is mandatory rather than discretionary.

Two more details from the text. Moving the house into your spouse's name to keep it out of the collateral pool doesn't work if you did it within 6 months of the application. And this is the one place the citizenship rules bend: a spouse who is otherwise an ineligible person, a green card holder for instance, may still sign the limited guarantee needed to pledge jointly held collateral.

Door 3: the bank needs the income

Here is the clause behind almost every spousal guarantee I see requested:

The SOP's own example is a key employee with little or no ownership. On acquisition loans, the "credit reason" is nearly always the same one: the household budget doesn't work on the buyer's income alone, and the bank cannot count the spouse's income unless the spouse is on the hook for the debt.

Underwriters run two tests. The first is the business coverage ratio, which for a first acquisition under the new SOP has to be at least 1.25x on historical numbers, with projections reviewed but not relied on. The second is global cash flow, where the SOP requires 1:1 coverage across the business and the owners' personal obligations combined, and adds a sentence that matters enormously here: the owner's compensation "must be sufficient to support their current obligations and living expenses."

Spousal income is "outside income" in the SOP's vocabulary. It can offset personal obligations and living expenses. It cannot be added to business cash flow. So the underwriter's question is narrow: does the salary this buyer will draw from the business cover the household's mortgage, cars, tuition, and the rest? If yes, the spouse stays out of it. If no, the bank either counts the spouse's income, which requires the spouse's guarantee, or finds coverage somewhere else.

A hypothetical to make it concrete. A buyer leaves a corporate job that paid $240,000 to run the acquired company at a salary the business can actually support, call it $150,000. The household budget was built on the old number and runs about $175,000 a year. The spouse earns $110,000.

The business might clear 1.25x with room to spare. It doesn't matter. The household test fails at 0.86x on one income and passes at 1.49x on two, and the spousal guarantee is the switch between those two rows.

That is why "will they ask for my spouse" cannot be answered without seeing your household budget next to the deal. Anyone giving you a flat yes or no before looking at both is guessing.

Same deal, two banks, two answers

Three hypothetical partners are buying a $6 million services business. Each writes a real check, each has a strong personal balance sheet, and the business covers debt service on the seller's adjusted EBITDA with room. Bank A pre-flights the deal and has a term sheet back in three days with the three partners as guarantors and nobody else. Bank B looks at the identical file and says it will probably need spousal guarantees or a restructured seller note.

Bank B's reasoning, when you ask for it, is textbook. It has to count the full personal budget of each of the three households, and without spousal guarantees it can only count three incomes against three households' expenses.

The seller note is interest only for two years, and this bank wants a three year standby before it will exclude the note from the coverage test; under the new SOP that note is underwritten on a 10 year amortization regardless, so the test is tighter than the partners modeled. And the adjusted EBITDA carries 20% to 30% of add-backs before owner compensation, which the bank haircuts.

The partners ask the obvious question: won't our balance sheets cover this? The answer is no. Liquidity gets a household through a bad quarter. It does not change the ratio the underwriter has to hit, and the new SOP requires that ratio on historical numbers. A balance sheet and a cash flow test answer different questions.

The lesson is that the spousal guarantee is a credit box decision, and credit boxes differ. Two banks with identical SBA authority will read the same household differently. That is a legitimate reason to pick one term sheet over another, and it is a question to ask in pre-qualification rather than discover in underwriting.

There are four rungs, and most buyers only know two

Buyers tend to think of this as binary: either the spouse signs or they don't. The SOP actually describes a ladder, and the middle rungs are where the negotiation happens.

The rung people miss is the third one. When a lender requires a guarantee for credit reasons, the SOP lets it be a limited guarantee, and if it's limited, the lender has to pick a specific limitation from SBA Form 148L and write it into the loan terms.

In practice that means the spouse's exposure can be capped at a dollar amount, at a percentage of the balance, or to a period of time, with a release once the loan has performed. A spouse who would never sign an unlimited guarantee will often sign a $250,000 cap or a three year sunset. Ask for it. Not every bank will agree, and the answer tells you a lot about the bank.

Full guarantee versus collateral signature

These two documents get confused constantly, usually at the closing table. Here is the difference under the new SOP.

If your spouse is being asked for the left column and you assumed it was the right column, stop and ask which door it came through. You're entitled to know.

Where the citizenship rules meet the marriage

Since March 1st, every direct and indirect owner and every SBA required guarantor has to be a U.S. citizen or U.S. national with a principal residence in the United States. Green card holders are out. The new SOP locks that in, and it cuts both ways for couples.

If your spouse is a permanent resident and owns even 1% of the acquiring entity, the deal is ineligible, and the only cure is complete divestiture before the loan number issues. If your spouse owns nothing, the deal is fine, and the limited signature on jointly held collateral is expressly allowed. Disclose it up front. A surprise about a spouse in underwriting is a surprise about the borrower.

Now the reverse. Picture a buyer with a pending citizenship application and a spouse who is a citizen. The only way this deal works is with the spouse as the owner, which makes the spouse the borrower and the guarantor. The underwriting question changes from "will the spouse sign" to "can the spouse run this company," and if the spouse has a demanding career of their own, the bank will ask how the business gets managed day to day. That deserves a documented management plan before you go under LOI, not a conversation in underwriting.

What October 1st changes

The spousal guarantee paragraph itself carried over intact. What changed is the pressure around it, and each change pushes more households toward Door 3.

Half of your equity injection now has to come from unlimited sources, which in practice means cash you didn't borrow. For most couples that cash sits in a joint account, and the bank will source it, so your spouse's statements are in the file from day one.

The business coverage test moves from 1.15x to 1.25x on historical results for a first acquisition. Projections can't be relied on. Any acquisition debt that isn't on full standby gets underwritten on a 10 year amortization even if it's interest only. Each of those tightens the business side, and when the business side is tight, underwriters lean harder on global cash flow.

Owner compensation adjustments now have to be substantiated by a global cash flow analysis showing the principals can meet their obligations on the adjusted salary. If you're adding back the seller's $300,000 compensation and replacing it with $150,000 for yourself, the SOP requires the bank to prove you can live on $150,000. If you can't, the spouse's income is the most likely fix, and that means a signature.

When they don't ask

Plenty of deals close with no spousal signature beyond the mortgage. The pattern is consistent. The buyer's own compensation and outside income cover the household budget with room. The business clears 1.25x on historical numbers without heroic add-backs. The seller note is either on full standby or amortizes comfortably inside the test. When those three things are true, the bank leaves the spouse alone, and I'll say so in writing in a letter of support.

The lender who asked for spousal guarantees on the three partner hypothetical would tell you the same thing. She was reading cash flow. When the cash flow reads differently, so does the ask.

What I'd do before you go under LOI

Build the household budget first. The bank will reconstruct it from your tax returns and personal financial statement anyway, so you might as well know the answer before they do. If it only works on two incomes, Door 3 is open, and you and your spouse can decide how you feel about that before a lender decides for you.

Set your salary deliberately. The number you put in the model for your own compensation is the number the bank tests your household against. Too high and the business coverage suffers. Too low and the global test fails and the spouse gets pulled in. There is usually a range that clears both, and finding it is worth an hour with whoever builds your model.

Ask the policy question in pre-qualification. Every lender we work with will tell you how they treat spousal income for jointly filing households if you ask directly. Some rarely require the guarantee. Some require it whenever the spouse's income is needed. Some will do a capped or time-limited guarantee, and some won't. Knowing which is which is part of why buyers hire us, and it should inform which term sheet you take.

Treat the collateral signature and the full guarantee as two different decisions, because the SOP does. Your spouse will almost certainly sign on the house. Whether your spouse becomes fully liable for the debt is a separate question, and it's a family decision as much as a financing one. Adding a spouse's income strengthens the file. It also puts them on the hook. Have that conversation deliberately rather than as one more signature page in a stack of forty at closing.

Keep the cap table honest. If your spouse doesn't need equity, don't give them any, because the household aggregation rule means it can only add a guarantee. If your spouse can't hold equity under the citizenship rules, make sure they don't, all the way up the ownership chain. Settle all of it before the SBA loan number issues, because a change after that point sends the file back through, and after October 1st it goes back through under the new SOP.

If the guarantee itself is the sticking point, two carriers now write personal guarantee insurance for SBA borrowers. I covered them in The Personal Guarantee. Coverage typically sits around half the exposure at 1% to 2% of the loan amount a year. For a household nervous about a second signature, it can be what makes the decision easier.

The 60 second version

• SBA loans are special-purpose credit programs under ECOA. The bank is allowed to ask about your spouse and to require their signature.
• The SBA requires a full guarantee from anyone owning 20% or more, and it combines spouses and minor children for that test. A 15/10 split between spouses means two full guarantees.
• A non-owner spouse must sign the collateral documents on jointly held real estate when there's a shortfall. That guarantee is limited to their interest in the property, and they don't sign a personal financial statement.
• The full guarantee on a non-owner spouse comes from the bank's "credit or other reasons" authority, and it almost always traces back to global cash flow: the bank can only count your spouse's income against the household budget if your spouse guarantees.
• A credit-driven spousal guarantee can be limited under Form 148L, capped by dollars, percentage, or time. Ask.
• The new SOP tightens the business test (1.25x, historical, 10 year amortization on non-standby acquisition debt) and requires owner compensation to be proven sufficient for living expenses. Both push more files toward a spousal ask.
• A green card holding spouse can sign the limited collateral guarantee but cannot own any of the business. Disclose either situation before underwriting.
• Two banks can read the same household differently. Ask the policy question in pre-qualification and let it inform which term sheet you take.

The guarantee is the price of admission to a program that lets you buy a business with a fraction of the price in cash. Whether that price gets paid by one member of the household or two should be a decision you make on purpose, with the numbers in front of you, before a lender makes it for you.

Thanks for reading!

If you're working on an acquisition, or are in the pre-LOI phases, you can book a short, informal call here to meet our team and learn how we can help you.

For pre-LOI buyers ready to explore opportunities: Schedule a meet & greet call​

Already have a deal under LOI and need financing help: Schedule an LOI consultation​

Independent sponsors on a non-SBA deal (pre-LOI): Schedule a financing call with Rafael​

Independent sponsors with a deal under LOI: Schedule an under-LOI call with Rafael​

Until next time,

Matthias Smith

President, Pioneer Capital Advisory

​www.pioneercapitaladvisory.com​
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Disclaimer: The information in this newsletter is for informational purposes only and should not be considered legal or financial advice. Business buyers are encouraged to consult with their legal counsel and accountant to ensure the proper structuring of their transactions and to fully understand the tax implications of seller financing.

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