 | Tip of the Week Dealing with SBA’s Concern in Business Acquisition Lending One of the areas where SBA treads carefully and deliberately is when lending is for the purpose of a business acquisition. Historically, SBA has always indicated that there must be a justifiable reason for the change of ownership to take place (preserve the existence or promote the sound development of the business), before the government should step in and assist with such a transaction. So, all along SBA has encouraged caution in this arena of lending. But with several well publicized examples of fraudulent activity surrounding business acquisition lending over the past several years, SBA has understandably tightened their focus and concern on this specific type of lending. Such fraud has been perpetrated by third party service providers (appraisers, packagers, brokers), and a few rogue lenders and bankers. SBA addressed such problematic lending several years ago by tightening up the requirements. Most of us remember Policy Notices 5000-693 and 5000-764, where SBA came in with a “sledge hammer” approach by requiring such things as two real estate appraisals (softened to review of first appraisal) if the business had been transferred within the last 36 months prior to SBA loan application. SBA was trying to mitigate the risk associated with the transaction “players” churning or flipping businesses from buyer to buyer while justifying the transactions with “increasing” values of the business. We wonder if any of this rings familiar as we now watch the crisis of our economic condition being played out in the media today (wasn’t the fall out of the subprime mortgage industry based in part on such over valuation of assets?) SBA “fine tuned” their requirements with the issuance of the new SOP 50 10 (version 5) that became effective August 1, 2008. Take note, SBA verbiage says: - The seller may not remain an associate of the business because this would result in an ineligible use of proceeds.
- If the existing debt (of the seller) is guaranteed by SBA and is with the participating lender, the application cannot be processed using PLP or SBAExpress procedures.
- If there is business real estate as part of the change of ownership, the real estate cannot be financed separately by a non-SBA guaranteed loan (unless there is a shared lien position).
- A site visit is required on assets to be acquired.
- For loans greater than $350,000, or if there is a close relationship between the buyer and the seller, the business valuation must be performed by an independent and qualified source.
- The lender should consider seller financing (in a subordinate lien position to the SBA loan) for the financing of the intangible part of the business purchase (goodwill).
Perhaps you still have questions surrounding many of the new requirements stated in the new SOP. Some of those questions might be: - Can’t the seller stay on board with the business being acquired for a short, transitional period? If so, how does the lender document the seller’s intent and what is the time limitation imposed to make sure the seller will not be considered an associate of the business by SBA?
- Is the 3rd party business valuation requirement based on the “business acquisition or transfer” portion or the “total loan” amount?
- Business valuations come in many different forms and fees are all over the board (anywhere from $2,000 to $10,000). What type of business valuation is required?
- Business valuations for the larger deals must be performed by an “independent” party. Define what our options are when selecting an independent party. Who, what and how should I engage a business appraiser?
- What valuation approaches must the lender and the valuator always consider?
- Once I receive the business valuation, what am I looking at and how do I review it?
- What documentation should the lender include in its file for every business acquisition transaction?
Join Karen McHugh and Steve Mize (GCF Valuation at www.gvalue.com) at the NAGGL conference (go to www.naggl.org) later this month in Indian Wells, CA, when they pose these questions (and more) and help provide clarity in a break out session addressing SBA requirements pertaining to business acquisitions. Gail Hepler, with SBA, will be presenting alongside us to further clarify these issues and be available to answer lender questions. It is a good opportunity to have a frank discussion with SBA about how to mitigate any concerns of this type loan transaction guaranteed by the government. Take the right approach. Karen McHugh and Brian Burke | |
