SBA Eliminates 7(a) Goodwill Cap! Small Deal Financing to Get a Boost
from New SBA Guidance (Effective 10/1/2009)
Many of you may remember that on March 1, 2009 the SBA limited "goodwill" financing to 50 percent
of the loan amount or up to a maximum of $250,000 for its most popular SBA 7(a) loans. In essence, the SBA's low
goodwill cap eliminated an important source of financing in the small businesses marketplace and resulted in dead
deals for many buyers and sellers of service and internet related businesses who had otherwise viable offers on the table.
Goodwill, as you likely know, is the value of a business that can't be accounted for through tangible
assets such as machinery, equipment, fixtures and improvements to land; instead it is the portion of a business that
derives its value from intangible things that a business seller has built up over the years such as cash flow, client
lists, copyrights, trade names and the like. And while goodwill is a significant component to most businesses being
sold, it is one of the riskiest assets that can be financed, because it typically has no liquidation value in the
event a loan defaults.
After the SBA goodwill cap went into effect, lenders, business brokers, and others in the M&A community
howled to the press and their elected representatives, contending 1) the reason for the existence of the SBA 7(a)
program is to allow lenders to have a guarantee when collateral is an issue but there is good cash flow in the
target company; 2) that this artificial limit would make it impossible to use SBA loans for a significant number
of business acquisitions with the overall effect of removing more credit from the marketplace and further slowing
the national economy; and 3) that the cap would lead to more layoffs for lenders and brokers which have dedicated
SBA lending units.
Under the new rules posted this week on the SBA website, and effective October 1, 2009,
lenders may finance $500,000 of goodwill value.
The SBA also eliminated a provision that stipulated that goodwill financing could amount to no
more than 50% of the total value of the loan for a small business purchase. Under the new SBA guidance, any amount
of goodwill up to the overall lending limit of $2 million may be financed and may be approved under delegated authority
by a preferred lender participating in the SBA's 7(A) loan program so long as there is at least 25% equity provided in
any combination of borrower down payment, which can be as low as 10%, and seller stand-by financing up to 15% of the
purchase price.
For those of us in the M&A community, this is welcome news. The new rules should make financing
easier for buyers, provide additional clarity for lenders, and significantly increase availability of SBA financing.
Now let’s hope that the new guidance sticks around for a while and that surviving SBA lenders have enough staff to
contend with what should be a significant amount of pent-up demand. Written by: Chris Peck, President and Founder
of The Peck Law Firm, P.A. Business and Property Counsel
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