New SBA Changes to go into Effect October 1, 2009

We’ve been following the changes that the Small Business Association (SBA) has made to its SOP and have written about them here and here. The changes have resulted in businesses having difficulty securing funding, especially funding to put toward a business acquisition, so the SBA agreed to review its changes and decided to put amended changes into effect on October 1, 2009. 

 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

Tags: SBA Changes, SBA SOP changes, SOP Policy changes 2009
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Pending SBA Loan Policy

The number of Small Business Administration-approved loans is declining — so far this year, the number of loans is down 50% from this time last year. Many factors have contributed to this decline. Lenders say that high fees associated with SBA loans make them less profitable. And the practice of selling loans to a secondary market, freeing up capital to make new loans, froze last fall along with everything else.

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

Tags: Appraisals, Business Valuation, Machinery & Equipment, Machinery and equipment appraisal, SBA SOP changes
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SBA SOP 50 10 5(A) Changes in Effect This Week

The Small Business Administration (SBA) announced revisions to SOP 50 10 5(A) that went into effect on March 1, 2009. Because the number of 7(a) loans being used for business acquisition has increased, the SBA determined that more specific guidance on the financing of goodwill was appropriate and made additions to SOP 50 10 5(A).

According to the SBA’s definition, goodwill is created when an existing business is acquired and the acquiring entity pays more for the business than the book value of the business’s assets. By paying a premium for an established business, the buyer is relying on the existing business’s established market share to continue because of an established customer base or a premium location.

Because the agency doesn’t have data that specifically identifies goodwill in business acquisitions and there are limited options for borrowers who wish to finance business acquisitions involving a substantial amount of goodwill, the SBA decided that it will review loan applications that do not meet the guidance in the SOP.

For loan applications where the request for 7(a) financing of goodwill exceeds the limits set in SOP 50 10 5(A) because the buyer and/or the seller are unable to finance the amount of goodwill that exceeds the SOP limit, the lender may submit the application to the Standard 7a Loan Guaranty Processing Center (LGPC) for the SBA’s consideration.

The SBA announced that this process will be in place through August 31, 2009. After that time, the SBA will provide further guidance on this issue. During this six-month period, the SBA will collect information from the applications submitted to the LGPC and analyze the types of businesses and transaction structures submitted.

Within this six-month window, it will be critical for lenders and business brokers to get an accurate appraisal of a business’s book value to determine if the SOP 50 10 5(A) revisions could apply to your business transaction. To order a business appraisal, click here.

Tags: business appraisals, SBA SOP changes, SOP 50 10 5(A)
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