Article by Roger Schlueter, MBA
Segments of these Rules were taken directly from the SBA SOP (Standard Operating Procedure).
This article is about financing Good Will or Intangible Assets, with the 7a Loan Program, when financing the buyout of a company with a change of ownership.
Historically, financing the purchase of a business that has Good Will or Intangible Assets to be acquired with the business has been very difficult under Bank financing. The SBA in the past had a formula that told you how much Good Will or Intangible Assets could be financed with a SBA Loan.
SBA changed this aspect of it’s financing with the changes to the SBA SOP in October of 2010, and continued the rules in the October 2011 SOP. The change was monumental when it came to financing Good Will and Intangible Assets. The rules will be outlined below but if the Good Will or Intangible Assets are $500,000 or less then they are able to be financed fairly easily. There are special rules if the Good Will or Intangible Assets are Over $500,000. The Rules Are As Follows for all financing of Good Will or Intangible Assets using the SBA 7a Guarantee Program.
The SBA Guarantee Loan may be used to finance a change of ownership of a business.
1) The Applicant must be purchasing 100% of the ownership interest, either by an asset or stock
purchase.
2) The Seller can only remain with the business as a consultant for a short period of time – 12 months
or less.
3) The Business must be the borrower.
4) For a Complete change of ownership, the lender must verify the the sellers business tax returns or a
sole proprietors schedule C.
5) If Real Estate is part of the change in ownership, the real estate cannot be financed separately unless
the SBA gets a shared lien position (this does not apply if used with a SBA 504 Loan).
6) These changes of ownership are not eligible:
a) A non-owner purchasing a portion of the ownership of the business from a selling owner.
b) Existing owner who is purchasing the ownership from an existing owner that will not result in 100%
ownership by the purchaser.
7) The SBA considers a change in ownership to be a “NEW” business because of unproven
ownership/management and increased debt unrelated to the business operation.
a) The lenders loan documentation includes:
1) A Business Valuation
– if the amount being financed minus the appraised value of Real Estate &/or equipment being
financed is $250,000 or less , the lender may perform its own valuation of the business being
sold.
– If the amount is greater than $250,000 or if a close relationship between the buyer and seller
exists, (like family or business partners), then the lender must obtain an Independent Business
Valuation from a Qualified Source.
2) A site visit of the assets acquired. Lender must document in their loan file date & comments.
3) A Real Estate Appraisal that meets SBA Guidelines.
4) An Analysis of how the change in ownership will benefit the business.
b) Intangible Assets: The SBA Guaranteed Loan may be used to financed Intangible Assets in a
change of Ownership.
1) The Intangible Assets are $500,000 or less, (Including but not limited to: Goodwill, Client /
Customer Lists, Patents, Copyrights, Trademarks, and agreements not to compete).
2) If the purchase price of Intangible Assets are greater than $500,000 then the borrower and seller
must provide an injection of at least 25% of the purchase price of the business for the applicant
to be processed under delegated authority, (seller equity is defined as seller takeback financing
that is on full standby, (principal and Interest) for 2 years or more).
3) If the Tangible Assets are in excess of $500,000 and the equity contribution from the borrower
and seller combined is less than 25% , the application cannot be processed using delegated
authority and must be sent to Sacramento under the regular SBA 7a consideration.
4) Real Estate may not be may not be removed from the transaction and financed separately to
avoid the 25% equity injection requirement for PLP processing.
5) The value of the Intangible Assets is determined by the book value of the Balance Sheet,
a separate appraisal, or valued by the business valuation minus the sum of Working Capital
&n
bsp; Assets and the Fixed Assets being purchased.
6) Amount of any Intangible Assets being financed must be identified in the Uses of Proceeds
section of the Application and the Authorization.
7) The Lender must obtain a current business valuation in accordance with SBA Guidelines. This
topic will be covered under a separate article entitled “The Business Valuation Requirement in a
Change of Ownership”.
This seems like a lot of Gobbledygook but considering the fact that the SBA did not want to finance Intangible Assets even in a Change of Ownership in the past, this is a breath of fresh air.
Please see my Webpage at www.schlueterfinancial.com for contact info or additional info on Financing.