SBA, the Goodwill Cap and Intangible Asset Valuation: An Update
Attend the September 28, SBA Webinar to learn what required in Business Appraisals for SBA Loans
By Scott Gabehart, CBA, MIM
With the SBA formally requiring independent business appraisals by “qualified” parties such as CBA’s for the first time ever as of June, 2008, an already viable appraiser work option expanded significantly. Alas, the SBA “giveth” and the SBA “taketh away”. Around nine months later, the SBA effectively eliminated a large portion of the “required” appraisals with a policy change dealing with the financing of “goodwill” or “blue sky”.
Although the picture was extremely bleak as of early April, 2009, a number of forces appear to be at play which should eventually serve to reverse the downturn in so-called “change of ownership” loans involving SBA-guaranteed bank financing. Contrary to public perception, the SBA actually does want to implement programs which benefit small businesses and their employees. But it should not be forgotten that their allegiance is ultimately to the business itself (moreso than the “buyer” or borrower) and not to the seller of a business. Much of SBA policy (including the goodwill cap) is driven by the desire to protect the small businesses which drive the US economy.
As of mid-June, 2009, the SBA is now into its fourth month of the “delay” in officially implementing the so-called “goodwill cap” (related specifically to SBA-guaranteed financing of change of ownership loans) at $250K or 50% of the loan amount. As expected, the “delay” has not led to a rush on the part of lenders to obtain the “exceptions” granted by the SBA upon completion of their internal review for all change of ownership loans with goodwill in excess of $250K. With SBA lenders constantly (and rightfully) concerned with meeting all requirements in order to sustain the validity of the SBA’s “guarantee”, even the smallest amount of doubt as to what a new policy entails can lead to a collective “freeze” similar to the US economy on September 12th, 2001.
The uncertainty associated with the introduction of the cap and even its subsequent and partial reversal via the acceptance and granting of “exceptions” during a six month trial period has led to a continued contraction in the volume and value of 7(a) change of ownership loans. Although loan volume has begun to pick up as of the end of May, 2009, there is little doubt that the “cap” has had the undesirable impact of deterring change of ownership loans.
In this appraiser’s opinion, the introduction of the cap and the six month “delay” period (via Information Notice 5000-1096) is being used as a means to gather detailed information involving the larger transactions which represent the greatest “risk” to the SBA in terms of potential defaults and charge-offs. It is likely that the cap will eventually be eliminated or elevated substantially at the end of the six month period ending August 31st, 2009. Alternatively, other changes will be forthcoming with the goal of reducing loan risk without penalizing those firms which happen to be comprised largely of intangible assets.
Ideally, the cap will be eliminated entirely after their six month review for a whole variety of reasons (see my write-up at the end of this memo titled “Did You Know…..? for a list of such reasons). Along these lines, the leadership of the IBA and other appraisal organizations have cooperated and declared their position on the topic which either supports elimination of the cap completely OR recommends the adoption of GAAP-like recognition of the various intangible assets which comprise the bulk of value in today’s companies in the U.S. If we do not collectively and firmly continue to address this issue, the consequences will be most negative for business owners and appraisers alike.
In the final analysis, it is my belief that the SBA and the final policy related to change of ownership loans will return somewhere close to the former “status quo” whereby the lenders assess the credit risk of a given transaction and the amount of goodwill is no longer a primary or contentious issue. A solid credit analysis supported by a detailed and credible business appraisal will once again likely be the key to garnering approval (and sustaining guaranty rights) for change of ownership loans for PLP and standard lenders alike. This appears to be the case even now as the cap still remains “in play”.
The good news is that the SBA has recognized that another option designed to minimize default and charge-off rates may be superior to the goodwill cap. This consistently underfunded government agency has been charged with ever more work while receiving ever less financial support from the Administration and the Congress. To their credit, they have already made a number of positive changes to the business valuation component of their SOP and plan on continuous improvements on a routine six month cycle (with the next cycle beginning on September 1st, 2009).
The primary challenge at present appears to be one of resources and priorities. With a variety of other changes being implemented by the SBA, e.g. the ARC loan program, implementation of a new flooring financing program and a variety of “stimulus” oriented measures, the historically depleted SBA staff is truly spread too thin. After 8 years of real reductions in their budget and manpower, they are being asked to produce a workload which is far greater than what existed just one short year ago.
The resource challenge has also led to a growing backlog of yet to be approved loans of all types, further compromising the effectiveness of the SBA in general and in terms of their role in stimulating the economy during the current recession. To be fair, it is not the SBA’s fault that their budget was the only area of the federal government which actually shrunk under 8 years of the Bush Administration.
Goodwill Cap and Intangible Asset Valuation
After an immediate and substantial backlash from the lending community to this portion of the new SOP50-10(5)(A), the SBA has partially “delayed” the implementation of the goodwill cap of $250K for six months. The “cap” was first formally introduced with an effective date as of 3-31-09, which was followed with a revision put forth almost as quickly through the publication of a so-called “Information Notice” (specifically Information Notice 5000-1096) sent out to all participating lenders. The cap literally “came out of the blue” as virtually nobody in the SBA community was expecting this type of restrictive change. These Information Notices are intended to shed light on SBA programs and provide additional and detailed guidance with respect to existing regulations found in the SOP50-10(5)(A) publication.
Despite the “delay” in implementing the formal cap as clarified in the 5000-1096 document, they are still requiring all such deals in the meanwhile to be reviewed separately by the SBA for case by case approvals. This means that even so-called “Preferred Lenders” must seek a secondary, external and increasingly time-consuming approval in the form of an “exception” to the stated policy. In short, all change of ownership loans with goodwill over $250K (or greater than 50% of the loan amount) must be sent to “Central Processing” in Sacramento for a separate underwriting process.
They have provided some guidance in Information Notice 5000-1096 (which is presented at the end of this article) as to what goodwill is and how it is calculated, etc. They are quite clear in stipulating what is or is not to be considered goodwill and how it is to be “valued”. Importantly, they do not indicate or infer that valuation analysis which supports the value of goodwill and other intangibles such as “customer base” or “tradename” or “website” or “covenant not to compete” would aid in obtaining loan approval.
Here is the pivotal commentary from the 5000-1096 notice:
“If the business being sold has intangibles such as licenses or patents on its balance sheet, the book value must be used for these assets. Intangibles that do not have an existing book value may not be subtracted from the selling price.”
The basic problem now is that the SBA will not allow use of any intangible asset which is not already on the balance sheet (tax return) and, if it is on the balance sheet, only its book value may be used. They do raise the hope of the lenders to a small degree with the following statement after a discussion of what goodwill is:
“Customer lists and non-compete agreements are documents that the seller may provide to support the goodwill the seller is requesting.”
To understand their logic, you must first recognize that they are thinking in terms of deal structure as much as they are thinking of deal value as they want to make sure that the seller does his or her part in helping the deal materialize. The prior policy in SOP50-10(5) recommended that all goodwill be financed by the seller, but of course this was not possible and only rarely occurred. The newest version of the SOP (with the (A) at the end), of course, introduced the goodwill cap at 50% of the total loan up to a maximum of $250K with the intended consequence of higher levels of seller financing and/or buyer cash investment.
Hypothetically and ironically, the Information Notice comments infer that a business which just happens to have been acquired recently via an asset sale would or could have intangible assets on its balance sheet (from the historical “allocation of purchase price”) which theoretically could be used to help justify the given loan. Otherwise, most small businesses will not have any significant intangibles on their balance sheet (for book or tax purposes) – even though everyone knows that they exist and have value.
In response to these new rules and suggestions, it is conceivable that the target firm could file an amended return to “capitalize” certain intangibles, but this would have to be in accordance with IRS rules (as you well know) and it would be time-consuming and costly to boot. It is questionable if internally-prepared or even compiled financial statements with comparable changes would do the job given the SBA focus on tax return data.
I have been communicating with one of the longtime SBA personnel who have been active in writing the SOP and helping with the hiring of new personnel to review the change of ownership deals with excessive goodwill and I hope to be able to get your question (and a few others) addressed directly sometime this coming week. He has been extremely busy with the new rules and other changes (beyond the goodwill cap), but he assures me that they are paying close attention and will eventually provide a formal clarification of future SBA policy in this area. He is also quick to note that the SBA is welcoming the larger change of ownership loans and hopes that the volume will pick up soon and move back towards historically high levels.
SBA Definition of Goodwill
Within the current SBA guidelines put forth in the Information Notice 5000-1096 on
2-27-09, goodwill value is to be considered equal to the:
SBA Definition of Goodwill
Asset Sale
“Selling price minus the sum of the book value of all assets being purchased.”
Stock Sale
“Selling price minus (the sum of the book value of all assets being purchased minus the sum of all liabilities that are being assumed).”
In effect, goodwill is equal to the value of all non-tangible assets or the excess of the purchase price beyond the book value (or fair market value if an appraisal is obtained for F,F&E or real estate) of listed tangible assets, i.e. if it is not a tangible or hard asset specifically identified by the SBA, then it will be considered “goodwill”.
There are several important deviations from this formulaic approach to calculating goodwill:
Potential Deviations from Goodwill Formula Approach
1) If the acquired assets are appraised at a FMV greater than book value, the higher amount may be used to determine the amount of goodwill in the given deal.
2) If the target firm’s balance sheet already includes listed intangible assets such as a patent or license, their respective book values must be used.
3) Intangible assets which do not have an existing book value may not be subtracted from the selling price.
4) If the pending deal is a “stock purchase”, the relevant assets include inventory, fixed assets and possibly real property as well as potentially accounts receivable/deposits/prepaid assets, etc. less the amount of accounts payable and long term debts assumed by the purchaser.
Rather than seeking to minimize the amount of goodwill in a given transaction (in order to meet the temporarily delayed “goodwill cap”) in order to maximize the potential SBA loan size, the new Information Notice appears to suggest that the lender should attempt to “justify” whatever amount of goodwill is included in the pending transaction (recognizing that goodwill as used by the SBA is a proxy for all intangible assets).
Accordingly, it states that:
“Customer lists and non-compete agreements are documents that the seller may provide to support the goodwill the seller is requesting.”
Whereas the SBA is effectively considering all intangible assets as goodwill (but encouraging the identification of non-goodwill components), the IRS or GAAP would differentiate between goodwill and other intangible assets such as patents or trademarks or even “customer lists” – while considering that these non-goodwill intangible assets may have value prior to a business sale or irrespective of whether or not the business is sold. A covenant not to compete, on the other hand, would have no value in any case except for as a direct result of the actual sale of the company.
As a policy consideration, it might be preferable for the SBA to rely on the IRS’ detailed development of asset categories associated with IRS Form 8594 and all business sales in the form of an “asset sale”. Both the buyer and seller MUST agree on this allocation or risk an unwanted IRS audit of this area (and potentially other areas). As shown later, the IRS allocation rightfully distinguishes between goodwill and other types of intangible assets. My contact at the SBA seemed to like this idea, but only time will tell.
Possible Interim Solutions
As the SBA performs its analysis of goodwill and related deal structures as they pertain to change of ownership financing over the next six months, there may be helpful steps which can be taken by the lender and/or the appraiser to help maximize the chances of receiving loan approval.
There are two immediate options which could be considered when seeking to justify a larger loan amount when the goodwill is determined to be “excessive”. First, the firm’s tangible assets such as inventory and equipment could be appraised in order to verify the common situation wherein the market value of such assets is greater than their book value. In addition, the value of equipment “in use” is often considerably higher than the original cost or its “value in exchange”, e.g. the inclusion of sales tax, freight charges, delivery and site preparation fees, employee training, the learning curve, etc., all are “normal and necessary” expenses related to the installation and optimal use of many different types of equipment.
The second option involves a careful review and assessment of the various intangible assets which are associated with the target operation. The ability to work around the new goodwill cap and related issues will depend almost entirely on what the SBA determines to be acceptable and helpful in terms of supporting the given loan request. For example, if the SBA eventually agrees to allow certain identifiable intangible assets to be separated from goodwill and recognized as having market value, this will open the door to a careful evaluation and valuation of those intangible assets (including intellectual property) which credibly or plausibly could be sold on the open market.
For clarity, it is helpful to keep in mind some of the basic concepts of identifiable intangible assets from a legal point of view:
1. They must be separable from other assets.
2. They must be subject to the rights of ownership with legal protections.
3. They must be legally transferrable.
4. They must convey a commercial benefit to owner.
5. Their origin should be identifiable in time or resulting from an identifiable event.
In the current environment, it may be beneficial to review every deal with goodwill in excess of $250K with an eye towards identifying legally defensible rights such as:
1. Contractors licenses, e.g. general contractor
2. Professional licenses, e.g. medical or dental
3. Special retail licenses, e.g. #12 Liquor
4. Franchise licenses
5. Protected territories
6. Patents and copyrights
7. Brand identity
8. Others
If these assets exist but are not reflected on the firm’s balance sheet, it would be possible to make the appropriate adjustments to the internal financial statements (with or without an appraisal) or even amending federal income tax returns to “capture” the related value.
At the extreme, even certain internally generated (not purchased) intangible assets, e.g. workforce, customer lists, research and development, etc, could be identified and at least referenced in the lender’s or appraiser’s analysis. Although these intangibles are considerably more difficult to value and defend, there is little doubt that they do possess some degree of “value”. Furthermore, the unwillingness of the IRS to allow recognition of such assets for tax (amortization) purposes does not preclude its identification and presentation as a valuable asset for the SBA to consider.
Goodwill is a Good Thing
As suggested earlier, there are multiple interpretations of goodwill which extend beyond the SBA’s formulaic definition of “Selling Price Less Book Value of Acquired (Tangible)Assets”. Although there is some consistency between new GAAP rules on goodwill accounting, the IRS’ “residual method” and this “formula” method, the general shortcoming with the line of thinking put forth by the SBA to restrict or monitor goodwill-based lending is that goodwill should NOT be considered a negative feature or outcome or the reason why businesses default on their loans.
To the contrary, only successful firms will generate the profits needed to foster the presence of substantial goodwill (however defined). In fact, the more profitable (successful) a firm becomes, the greater the firm’s goodwill value becomes (all other things equal). The more profitable an asset-heavy manufacturing firm becomes, the greater the portion of value that is attributed to goodwill – is this a bad thing? In short, “goodwill” is a “good thing”.
As mentioned in my previous writings, at least one-half of the Top 30 Lowest Default NAICS codes (based on SBA-published data) are businesses which are comprised primarily of goodwill or other intangible assets, e.g. professional practices, internet firms, service firms, merchant wholesalers, etc (between 55% and 95% intangible asset value). Goodwill and/or other intangible assets are present in every business and they should not be “discriminated” against given their direct relationship to profitability and financial and operational performance. In fact, even those businesses considered to be “hard asset heavy” will feature goodwill values of at least 45% and often much higher (more profitable, more goodwill – get the idea).
Actual statistics related to real world business acquisitions are provided next in order to “document” this fact.
Approximate Goodwill Estimates By SIC Code***
SIC Code/Source Description Goodwill* as Percent of Price
SIC 5983/Pratt’s Fuel Oil Dealers** 80.7%
SIC 5085/Bizcomps Industrial Supply Distribution 47.5%
SIC 7537/Pratt’s Transmission Repair 56.3%
SIC 5912/Bizcomps Restaurants 52.8%
SIC 3499/Bizcomps Metal Fabrication 56.9%
SIC 5712/Pratt’s Retail Furniture Stores 73.4%
SIC 3599/Bizcomps Machine Shops 56.0%
SIC 8021/Pratt’s Dentists 78.2%
SIC 8082/Pratt’s Home Healthcare 95.6%
Range of Goodwill Value from Diverse Industries 48% to 96%
Median 57%
Mean 67%
*Goodwill is considered a proxy for all intangible assets, similar to the SBA perspective.
**Pratt’s Stats “asset sale” transactions may include accounts receivable and, rarely, assumed liabilities. Adjustments have been made to reflect their presence to the fullest extent possible. Bizcomps transactions are always reported as pure “asset sales”, but the price and corresponding multiples exclude the impact of inventory (the total price figure has been adjusted to reflect inventory before calculating the goodwill percentage).
***It should be noted that the fixed asset figures utilized by Bizcomps and Pratt’s Stats may be reflective of either book value or fair market value. Due to the tendency to utilize book values for such reporting and based on the fact that FMV is typically greater than BV due to accelerated depreciation methods, the fixed asset values used to generate the corresponding goodwill percentages may be somewhat understated (actual goodwill values may be somewhat lower than stated).
The “bottom line” interpretation of a goodwill cap (or any maneuver which seeks to reduce lending associated with intangible assets) is that it represents punishment against those firms which are highly profitable and/or hard asset-poor – irrespective of debt service ratios, credit records, business plans, character, etc. For these reasons (and many others), I commend the decision to delay the goodwill cap implementation.
Did You Know That the
New SBA Goodwill Restriction* May or Will…………………
1) Decrease the number and value of 7(a) loans as well as the number of 7(a) lenders across the nation (ceteris paribus)?
2) Create layers of misunderstanding, misinterpretation and/or misapplication of “the rules”, which in turn may compromise the integrity of a given lender’s loan guaranty?
3) Increase loan closing costs via the need for BOTH fixed asset AND inventory valuations (by certified appraisers) in order to “justify” (maximize) the potential loan amount and to sustain the loan guaranty within the new rules?
4) Create an increasingly common situation requiring a total of 4 (FOUR) MANDATORY CERTIFIED APPRAISALS for one given transaction (real estate, fixed assets, inventory and going concern/business) while simultaneously increasing total transaction costs?
5) Allow for a maximum 7(a) loan of only $60,000 for a home healthcare business which is generating over $900K in normalized profits and growing at more than 30% per annum and employing over 150 workers (due to minimal hard assets worth only $30K and the 50% goodwill threshold)?
6) Potentially increase the average default and charge-off rates due to the elimination of loans to high cash flow (and low default/charge-off rates) businesses such as professional practices (e.g. dentists, vets and insurance agents), various merchant wholesalers, translation and interpretation services and even painting contractors. Roughly 15 of the top 30 “Best Industry Performers” during the 2000 to 2005 timeframe were comprised of these types of businesses.
7) Harm professional practices and franchises, in particular. Of the 893 professional practices valued by one large national appraisal firm, 91% of the transaction price was considered goodwill. Of the 651 franchises, 86% of the transaction price was considered goodwill.
8) Generate a cottage industry of professionals who attempt to creatively but legally “work around the restriction” in order to serve their clientele?
9) Nearly eliminate the financing of professional practices, internet-based firms, home healthcare providers and many other profitable, growth-oriented companies which happen to have only minimal fixed or hard assets?
10) Possibly lead to increased litigation among buyers and sellers due to increased reliance on “second position” seller financing with full or partial standby status?
11) Possibly cultivate a negative perception among borrowers that the “new” SBA programs are not what they were intended to be?
12) Increase unemployment and decrease income among lenders, loan brokers, business brokers and business appraisers?
13) Penalize those companies which are maximizing sales and profits per dollar of fixed assets and inventory?
14) Be opposed by approximately 99.9% of industry professionals for a variety of different reasons (most of which are self-preserving to be sure)?
15) Negatively impact GDP and employment levels as the business owners delay their decision to sell and maintain their “status quo” rather than parting from the company and letting the “new blood” implement their typically more aggressive growth plans (including the hiring of new employees).
16) Reduce small business values, small business sales and IRS tax collections?
17) Possibly shift and increase the tax burden on the seller to a point which greatly reduces the appeal of such financing? For example, customer lists, non-compete, customer base and policies/procedures could be used to bolster the loan amount – all of these accounts are all associated with ordinary income taxation to the seller (not capital gains) in an asset sale.
18) Reduce the money creation process (and the availability of other funds for other borrowers over time) associated with loans and our fractional deposit banking system, i.e. it will NOT stimulate the economy?
*The planned SBA restriction calls for limiting the amount of “goodwill” financing to 50% of the total loan amount or a maximum of $250,000. This list represents potential outcomes based on the author’s review and analysis, with the actual impact of the new regulation unknown at this time.
SBA Information Notice 5000-1096
TO: All SBA Employees CONTROL NO.: 5000-1096
SUBJECT: SOP 50 10 5(A) policy regarding the financing of goodwill
EFFECTIVE: 2/27/2009
Background:
SBA Information Notice 5000-1092 issued February 6, 2009, announced the publication of the first update to SOP 50 10(5). The first update to the SOP is known as SOP 50 10 5(A) and will be effective March 1, 2009.
As part of the update, the section on the financing of business acquisitions was modified. Among the changes was new guidance on the amount of goodwill that may be financed with the proceeds of a 7(a) loan. Previously, SOP 50 10(5) stated the following regarding the financing of goodwill:
The lender should explore seller-financing with a subordinate lien to the SBA guaranteed
loan on the business assets. The amount of seller-financing that should be considered is the amount being borrowed by the buyer to finance the acquisition of intangible assets such as goodwill.
As the number of 7(a) loans being used for business acquisition has increased, SBA determined that more specific guidance on the financing of goodwill was appropriate and added the following to SOP 50 10 5(A):
Goodwill:
(1) If the purchase price of the business includes goodwill (or “blue sky”), the lender should explore seller-financing with a subordinate lien to the SBA guaranteed loan.
(2) The lender may finance a limited amount of goodwill. In no event may the amount of goodwill financed by an SBA guaranteed loan exceed 50% of the loan amount up to a maximum of $250,000.
(3) If any of the loan proceeds will be used to finance goodwill, the amount must be specifically identified in the Use of Proceeds section of the Authorization.
We have received comments on this issue from lenders and business brokers. Business brokers have commented that this will have a significant negative impact on their business. They are concerned that many sellers do not want to finance a portion of the sale to the new owner as was recommended in the previous versions of SOP 50 10. The comments from lenders are on both sides of the issue. Several lenders stated that they do not finance goodwill on a conventional basis. These lenders believe that goodwill is the riskiest asset on a small business borrower’s books and do not believe that an SBA guaranteed loan should used to finance goodwill. Other lenders stated that SBA financing of goodwill is the only financing available in the present credit market and that limiting the amount of goodwill that can be financed using a 7(a) loan to $250,000 will effectively stop business acquisitions. Some lenders suggested that many newly unemployed individuals are considering the purchase of a business and that it is appropriate for SBA, in its role of financing those businesses that cannot access conventional loans, to provide guarantees on loans to these individuals when seller financing is not available.
SBA began collecting data on business acquisitions approximately 4 years ago. But, as SBA did not expressly address the financing of goodwill in the SOP, the data does not include how much of the business acquisition was goodwill or whether the goodwill portion was financed by the seller or by the buyer with non-SBA guaranteed funds. Thus, the initial performance data of these loans is inadequate to draw conclusions on the overall performance of loans with a substantial amount of goodwill.
Because SBA does not have data specifically identifying goodwill in business acquisitions and because the Agency has been told there are limited options for those borrowers wishing to finance a business acquisition involving a substantial amount of goodwill, SBA has decided that it will review loan applications that do not meet the guidance in the SOP.
Option for SBA Review
For loan applications where the request for 7(a) financing of goodwill exceeds the limits set in SOP 50 105(A) because the buyer and/or the seller are unable to finance the amount of goodwill that exceeds the SOP limit, the lender may submit the application to the Standard 7a Loan Guaranty Processing Center (LGPC) for SBA’s consideration.
The submission must include:
1. a completed Form 4;
2. a completed Form 4-I including the lender’s internal credit memo;
3. a completed Form 159(7a) where required;
4. a detailed explanation as to the circumstances that prevent the seller and/or buyer from meeting the SOP requirements for the financing of the balance of the goodwill;
5. a business valuation as required in SOP 50 10 5(A), Subpart B, Chapter 4, Paragraph II.C. to include the name and address of the individual performing the business valuation;
6. any appraisals used to establish the value of real estate and/or equipment;
7. the name and address of any broker involved in the transaction and the fee charged for their services; and
8. any other information that the LGPC needs to finish processing a specific application.
This process will be in place through August 31st, 2009. At that time, SBA will provide further guidance on this issue. During this six month period, SBA will collect information from the applications submitted to the LGPC and analyze the types of businesses and transaction structures submitted.
Definition of Goodwill
“Goodwill” is created when an existing business is acquired and the acquiring entity pays
more for the business than the book value of the business’s assets. Simply put, “goodwill” is the premium the seller is requiring as part of the purchase price (and the buyer is willing to pay) for an established business in the marketplace as compared to that same buyer starting a new business. By paying a premium for an established business, the buyer is relying on the existing business’s established market share to continue due to such reasons as an established customer base, a premium location, etc. (Customer lists and non-compete agreements are documents that the seller may provide to support the goodwill the seller is requesting.)
For SBA purposes, the amount of goodwill resulting from a change of ownership is
determined as follows:
1. Asset purchase:
Selling Price minus the sum of the book value of all assets being purchased = goodwill.
(If the lender has obtained an appraisal for any real estate or machinery and equipment
being acquired, the appraised value may be substituted for the book value for these assets.
If the business being sold has intangibles such as licenses or patents on its balance sheet,
the book value must be used for these assets. Intangibles that do not have an existing
book value may not be subtracted from the selling price.)
2. Stock purchase:
Selling Price minus (the sum of the book value of all assets being purchased minus the
sum of all liabilities that are being assumed) = goodwill.
(If the lender has obtained an appraisal for any real estate or machinery and equipment
being acquired, the appraised value may be substituted for the book value for these assets.
If the business being sold has intangibles such as licenses or patents on its balance sheet,
the book value must be used for these assets. Intangibles that do not have an existing
book value may not be subtracted from the selling price.)
Additional Information
Lenders and other interested parties may continue to send suggestions concerning the SOP to SBA at SOP50-10Modernization@sba.gov. This e-mail box is set up to receive only. Questions regarding SOP 50 10 5(A) should be directed to the lender relations specialist in the local SBA field office.
_________________________
Grady B. Hedgespeth
Director, Office of Financial Assistance
Goodwill-Related Definitions
from the International Glossary of BV Terms
Excess Earnings—that amount of anticipated economic benefits
that exceeds an appropriate rate of return on the value of a selected
asset base (often net tangible assets) used to generate those anticipated
economic benefits.
Excess Earnings Method—a specific way of determining a value
indication of a business, business ownership interest, or security
determined as the sum of a) the value of the assets derived by capitalizing
excess earnings and b) the value of the selected asset base.
Also frequently used to value intangible assets.
Going Concern Value—the value of a business enterprise that is
expected to continue to operate into the future. The intangible elements
of Going Concern Value result from factors such as having a
trained work force, an operational plant, and the necessary licenses,
systems, and procedures in place.
Goodwill—that intangible asset arising as a result of name, reputation,
customer loyalty, location, products, and similar factors not separately
identified.
Goodwill Value—the value attributable to goodwill.
Intangible Assets—nonphysical assets such as franchises, trademarks,
patents, copyrights, goodwill, equities, mineral rights, securities,
and contracts (as distinguished from physical assets) that grant
rights and privileges and have value for the owner.