{"ok":true,"canonical_url":"https://dealroom.so/for-lenders/questions/how-does-a-lender-determine-affiliation-when-a-prior-owner-retains-less-than-20-equity-and","api_url":"https://dealroom.so/api/public/questions/how-does-a-lender-determine-affiliation-when-a-prior-owner-retains-less-than-20-equity-and","question":"How does a lender determine affiliation when a prior owner retains less than 20% equity and a consulting contract?","topic":"Affiliation & Size","audience":"lender","bot_mode":"lender","short_answer":"It depends on the specific terms of the consulting contract and the minority interest. Even with less than 20% equity, 'control' through contractual relationships or dominant influence can trigger affiliation.","rule":"Affiliation is based on 'control,' which can be actual or contractual, not just majority ownership. If a former owner, despite holding a minority interest, retains a consulting agreement that grants significant managerial decision-making authority or influence over the new business's operations, it could establish control and trigger affiliation. Lenders must analyze the substance of the agreement.","example":"A $1.2M acquisition loan involves a seller retaining 15% equity and a 3-year consulting agreement requiring seller approval for all capital expenditures over $10,000. The lender analyzes this contractual term, concluding that the seller retains undue control, thus triggering affiliation between the new and old entity for size standard purposes.","what_lenders_check":"Lenders must review all agreements for 'negative control' or undue influence by the seller, even with low equity. Undisclosed or misidentified affiliation post-closing can lead to the SBA denying guaranty purchase if size standards were improperly determined.","required_facts":["Minority equity retained","Consulting contract terms","Control provisions","Seller influence"],"source_families":["SOP 50 10 - Lender and Development Company Loan Programs","13 CFR Part 121 - Small Business Size Regulations","Affiliation and Lending Criteria for SBA Business Loan Programs - Final Rule"],"official_sources":[{"title":"SOP 50 10 - Lender and Development Company Loan Programs","url":"https://www.sba.gov/sites/default/files/2025-05/SOP%2050%2010%208%20Technical%20Updates%20effective%206.1.2025.docx"},{"title":"13 CFR Part 121 - Small Business Size Regulations","url":"https://www.ecfr.gov/current/title-13/chapter-I/part-121"},{"title":"Affiliation and Lending Criteria for SBA Business Loan Programs - Final Rule","url":"https://www.federalregister.gov/documents/2023/04/10/2023-07173/affiliation-and-lending-criteria-for-the-sba-business-loan-programs"}],"related_questions":[{"question":"How does the SBA define 'affiliation' when checking business size?","url":"https://dealroom.so/for-lenders/questions/how-does-the-sba-define-affiliation-when-checking-business-size"},{"question":"When does common management or shared facilities trigger affiliation for SBA 7(a) size determination?","url":"https://dealroom.so/for-lenders/questions/when-does-common-management-or-shared-facilities-trigger-affiliation-for-sba-7-a-size-dete"},{"question":"What factors are considered when evaluating affiliation between businesses that share common management?","url":"https://dealroom.so/for-lenders/questions/what-factors-are-considered-when-evaluating-affiliation-between-businesses-that-share-comm"},{"question":"What are the financial criteria for a business to qualify as 'small' under the alternative size standard?","url":"https://dealroom.so/for-lenders/questions/what-are-the-financial-criteria-for-a-business-to-qualify-as-small-under-the-alternative-s"},{"question":"Does an unfunded stock option agreement trigger affiliation for SBA 7(a) size standard calculations?","url":"https://dealroom.so/for-lenders/questions/does-an-unfunded-stock-option-agreement-trigger-affiliation-for-sba-7-a-size-standard-calc"},{"question":"What criteria does the SBA use to determine common management that triggers affiliation for size standard purposes?","url":"https://dealroom.so/for-lenders/questions/what-criteria-does-the-sba-use-to-determine-common-management-that-triggers-affiliation-fo"}],"related_terms":[{"term":"Owner Equity","url":"https://dealroom.so/glossary/owner-equity"},{"term":"Equity Owner","url":"https://dealroom.so/glossary/equity-owner"},{"term":"Affiliation","url":"https://dealroom.so/glossary/affiliation"},{"term":"Prior Lienholder","url":"https://dealroom.so/glossary/prior-lienholder"},{"term":"Prior Liens","url":"https://dealroom.so/glossary/prior-liens"},{"term":"Prior Approval","url":"https://dealroom.so/glossary/prior-approval"}],"related_tools":[{"name":"SBA 7(a) payment & fee calculator","url":"https://dealroom.so/sba-7a/calculator"},{"name":"Find an active SBA 7(a) lender","url":"https://dealroom.so/lenders"}],"data_freshness":{"last_reviewed":"2026-06-14","sba_rule_sources_checked_through":"2026-06-14"},"citation":{"label":"DealRoom.so SBA 7(a) Q&A","url":"https://dealroom.so/for-lenders/questions/how-does-a-lender-determine-affiliation-when-a-prior-owner-retains-less-than-20-equity-and","source_type":"DealRoom Q&A"},"caveats":["Grounded in the current SBA rulebook; verify against official sources before relying on it for a live deal.","Not legal, tax, or financial advice and not an approval decision."]}