Caps on SBA Goodwill Financing
The SBA is making a big mistake in imposing caps on SBA guarantees for deals that finance goodwill. It's bad for the small business economy.
The SBA plays a vital role in keeping the economy strong, but recent actions suggest that they may have veered off course on one important issue.
Specifically, the SBA has proposed new regulations that would limit the amount of goodwill financing to $250,000.
The new language is contained in Subpart B section 7(b) of the SBA's newest revision to its SOP 50 10 5(A). In SBA speak, SOP stands for "Standard Operating Procedures." They have a ton of them but SOP 50 10 5(A) defines operating procedures for SBA Lender and Development Company Loan Programs.
The language as currently drafted says the following with respect to SBA loans that involve goodwill.
- If the purchase price of the business includes goodwill (or "blue sky"), the lender should explore seller-financing with a subordinate lien to the SBA-guaranteed loan.
- The lender may finance a limited amount of goodwill. In no event may the amount of goodwill financed by an SBA guaranteed loan exceed 50% of the loan amount up to a maximum of $250,000.
- If any of the loan proceeds will be used to finance goodwill, the amount must be specifically identified in the Use of Proceeds section of the Authorization.
The second clause is the clause that is devastating news for America's small business owners. It punctures a big hole in one of the best wheels this pathetic economy has, the spirit of American entrepreneurship.
Goodwill, as you probably know, is the value of a business that can't be accounted for through physical things like assets in inventory in a warehouse. In other words, it's the difference between the price paid for a company acquisition and its fair market value.
As you can imagine, most businesses that are sold involve a significant goodwill component. The selling business owner has put years of work into building up the company. Their profit when selling a company is mostly in the goodwill value of the company, not in the brick-and-mortar assets that exist within the confines of the company's facilities.
So, now you understand one truism - that goodwill is a huge part of business-for-sale transactions.
A second truism is that SBA financing has been very important in facilitating the sale of businesses by retiring business owners to new business owners. Sure, credit has been tight lately, but the SBA is still vitally important to entrepreneurial successions.
Finally, a third truism -- something that nobody can contest -- is that entrepreneurial succession is vital for the economy. If a business owner cannot sell a business, the business may go under. When a business fails, the economy loses jobs and a GDP contribution. So anything you can do to facilitate business succession is a great investment because it allows businesses to continue to live, rather than perish.
SBA Goodwill Financing Caps Are a Mistake
So what's wrong with the proposed SBA language on SBA goodwill financing caps?
The new language effectively caps the amount of goodwill financing in SBA deals to $250,000. This language effectively eliminates an entire class of business-for-sale transactions that would otherwise occur, helping to provide a smooth business succession, keep employees working and continue to add value to the economy.
Domenic Rinaldi, managing partner of business broker Sun Acquisitions and a leading authority on the business-for-sale marketplace, recognizes the serious nature of this SBA change. "It will kill a lot of deals and leave owners and prospective buyers hanging on the vine," notes Rinaldi.
Remember, the whole point of the SBA 7(a) program is that it allow lenders to have a guarantee when collateral is an issue. It's a perfect program to help lenders lend on businesses where there are limited physical assets.
Now, by saying in effect "We really only want to lend on deals that involve physical assets," the SBA is defaulting on its core job of being there when the physical assets are not enough to guarantee a loan. In effect, the SBA is saying "we want less risky loans...only the loans that banks would lend on if we didn't exist or were not involved in the deal."
SBA, leave those deals for the bankers. Your job is to facilitate loans where goodwill is a big part of the deal.
This is a serious issue that is worthy of every entrepreneur's attention. If you have a spare ten minutes, send a letter to your Congressman or Senator to let them know that you think the SBA should not enact these caps on SBA goodwill financing.
This is a time when we need smart government policy with respect to the small business economy.
Unless we are missing something, this proposed language by the SBA to limit goodwill financing is essentially shooting the small business economy in the foot.
SBA, put the gun down. Just put the gun down. That's right. Now get back to enacting new policies that will help small businesses.
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