Wednesday, September 16, 2009

The SBA has come to Their Senses for Business Acquisition Lending

The SBA has finally realized the error of their ways and reversed their Standard Operating Procedure change enacted on March 1, 2009. The SBA, at a time when small business sellers and buyers needed them most, made the decision to limit the amount of goodwill a bank could finance in a business acquisition loan. The rules change restricted a lenders’ ability to finance goodwill under a 7(a) program for the lesser of 50% of the purchase price or $250,000, whichever is less. The effect of this change was catastrophic - causing the banking industry to essentially halt most, if not all, lending related to business acquisitions. In a business sale transaction the Goodwill is the amount of the purchase that is over and above the value of the fixed assets in a business. This SBA change was particularly acute given the fact that most US businesses are service based with the majority of value derived from Goodwill.

After months of lobbying by various industry groups the SBA has taken steps to correct their mistake. Effective October 1, 2009, the new rules will now allow for Goodwill and Intangible Assets as follows;

A) Financing of a loan with Less Than $500,000 of Goodwill is ALLOWED without Restrictions

B) Financing of a loan with More Than $500,000 of Goodwill is Permitted IF the combined equity from the Buyer and Seller is 25% or more of the Purchase Price

C) Financing of a loan with More Than $500,000 of Goodwill AND the equity from the Buyer and Seller is less than 25% MAY still be eligible, however it will require a full SBA approval under CLP and GP processing.

These changes combined with the SBA’s 90% loan guarantee to the banks is VERY positive news. It will take awhile for this change to filter through and impact small businesses but these actions are a big step in the right direction and to be applauded.

The challenge that will remain is the declining financial performance of many small businesses. Thus, business acquisition lending will probably not come back in a big way until the top and bottom lines of these businesses recover from the effects of the worldwide recession. The good news is that many small businesses have attacked their expenses through layoffs and the introduction other cost cutting measures and it may not take very long to see positive earnings when the economy turns around.

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