Sep 30, 2009

SBA Changes Course on Goodwill Financings

Prior to last March, SBA loans could be used to guarantee any amount of goodwill included in the purchase price of a small business. With certain business purchases, the value of goodwill (name recognition and customer loyalty) can be as high as 55% to 95% of the overall purchase price. Starting in March of 2009, however, the SBA placed a cap on the amount of financing for goodwill that it would guarantee--$250,000 or 50% of the loan amount, whichever was lower. The new rules were meant to prevent sellers from overvaluing their company's goodwill or intangible assets.

The changes resulted in a tightening of capital and a 33% drop in business acquisitions from the prior year. As reported in a Wall Street Journal article, "It was the antistimulus." After a study finding that $400,000 was the average for goodwill financings, the SBA decided to raise the cap to $500,000 starting in October. Under its new guidelines, the SBA also recommends 25% in equity from the purchaser in goodwill financings over $500,000. Hopefully, the new rules offer a reasonable compromise between unlimited financing for goodwill (which can cause problems for purchasers) and overly restrictive terms that inhibit business acquisitions.

 

 

For more detailed information on the important aspects of selling a business, see The Complete Guide to Selling a Business, by Fred Steingold (Nolo).