One of the major amendments has to do with the policies that affect the financing of goodwill. The SBA’s changes that were announced in March said that only 50% of a 7(a) loan could go toward financing goodwill, and that 50% could not exceed $250,000. The recent amendments say that if the value of a business’s goodwill is less than $500,000, 100% of a loan can go toward financing it, with no restriction. If the amount of goodwill exceeds $500,000, a lender may still finance 100% of goodwill as long as the purchaser agrees to put at least 25% of the purchase value into the transaction as equity. A full list of the SBA’s SOP can be downloaded and viewed here.

 Although these changes may make securing loans easier, it is still important that any business that will be involved in a transaction be properly valued.

 By: Present Value

In an effort to reverse this decline, Obama’s economic stimulus package tried to make SBA loans attractive again by reducing fees and increasing the government guarantee on 7(a) loans. However, recent SBA policy guidance regarding goodwill may thwart this effort.

Goodwill is the premium that a business buyer pays to a business owner for the business’ established market share, existing customer base, or premium location. Real estate and tangible assets, like machinery and equipment, are not considered part of goodwill. Under the SBA’s new policy, only 50% of a 7(a) loan can be used to finance goodwill, and that 50% may not be more than $250,000. The reason behind the SBA’s policy is that goodwill is a risky investment. In the event of a loan default and business liquidation, goodwill has no monetary value.

This policy will make it difficult for people to put SBA loans toward many business acquisitions, particularly those whose value is primarily derived from existing customers and name recognition. Because concerns have been raised about the ramifications of this change to its SOP, the SBA has agreed to review on a case-by-case basis loan requests that do not meet its policy, and may revise its policy in September of this year.

In the meantime, many banks and attorneys are taking a closer look at the value of a business’ tangible machinery and equipment assets, hoping that their value will offset the limitations placed on goodwill. The certified appraisers at Present Value can help determine the value of those assets. To order an appraisal, click here.

By: Present Value