SBA Update
By Scott Gabehart (BA, MIM, CBA)
October 2, 2009.
The U.S. Small Business Administration has once again updated its primary policy document related to so-called “change of ownership” loans which often require the services of “independent” and “qualified” business appraisers which include Certified Business Appraisers (CBAs) designation offered by the Institute of Business Appraisers. After a tumultuous six month period involving their March, 2009 decision to implement a “goodwill cap” associated with business acquisition financing, the SBA has “loosened” their grip in this area by issuing SOP50-10(5)(B) with an effective date of 10-1-09.
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The key changes involve elevating the goodwill cap to $500K (from $250K) and allowing “preferred lenders” to fully process even greater amounts of goodwill when the combined “equity” from buyer and seller total 25% or more of the planned purchase price. For those readers interested in learning more about the new SOP, it can be found at www.sba.gov (enter the term “SOP” into the search engine).
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The specific situations requiring an independent business valuation include a loan involving “related parties” (e.g. business sale from parents to children) or a total loan amount greater than $250K (after backing out the loan portion attributed to real estate and equipment). Although total 7(a) loan activity has plummeted from their cyclical high in 2007 (from close to 100,000 loans to an annualized rate of less than 40,000 loans), the current trend line is positive due to the recent change to the SOP and as a result of other “stimulative” changes linked to the Administration’s “stimulus” programs, e.g. elimination of borrower fees and elevation of guaranty percentages. �
Another relevant change concerns the new SOP’s clarification which requires the appraiser to reach a “conclusion” of value, effectively eliminating the viability of “calculation” engagements or other similar “limited” appraisal reports. Considering that there were no formal requirements for using an independent and qualified appraiser as recently as 18 months ago, the SBA has evolved substantially in terms of its recognition that complete and credible business appraisals are an important element of the “change of ownership” loan program. In fact, the new SOP specifically states that this is the case on page 185 of SOP50-10(5)(B):
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“Determining the value of a business (not including real estate which is separately valued through an appraisal) is the key component to the analysis of any loan application for a change of ownership. An accurate business valuation is required because the change in ownership will result in new debt unrelated to business operations and create an intangible asset. A business valuation assists the buyer in making a determination that the seller’s asking price is supported by historic operations and permits the buyer to make a reasonable return on his or her investment.”
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Surprisingly, this seemingly simple paragraph includes verbiage (signals) which help the appraiser to determine both the type of report which is required and the relevant standard of value. Because the SOP does not directly address these pivotal valuation issues, it is incumbent upon the appraiser to be aware of the proper valuation approach to use for this very unique appraisal environment (unique in the same way that matrimonial dissolution appraisals are unique).
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In short, the recent changes implemented by the President and Congress as well as the SBA should lead to a substantial uptick in the number of the 7(a) program loans which require independent business valuations. Given that loan generation had already picked up substantially over the past three months, the remainder of 2009 and 2010 should see even greater loan volume – and greater demand for appraisal services.
�
The key changes involve elevating the goodwill cap to $500K (from $250K) and allowing “preferred lenders” to fully process even greater amounts of goodwill when the combined “equity” from buyer and seller total 25% or more of the planned purchase price. For those readers interested in learning more about the new SOP, it can be found at www.sba.gov (enter the term “SOP” into the search engine).
�
The specific situations requiring an independent business valuation include a loan involving “related parties” (e.g. business sale from parents to children) or a total loan amount greater than $250K (after backing out the loan portion attributed to real estate and equipment). Although total 7(a) loan activity has plummeted from their cyclical high in 2007 (from close to 100,000 loans to an annualized rate of less than 40,000 loans), the current trend line is positive due to the recent change to the SOP and as a result of other “stimulative” changes linked to the Administration’s “stimulus” programs, e.g. elimination of borrower fees and elevation of guaranty percentages. �
Another relevant change concerns the new SOP’s clarification which requires the appraiser to reach a “conclusion” of value, effectively eliminating the viability of “calculation” engagements or other similar “limited” appraisal reports. Considering that there were no formal requirements for using an independent and qualified appraiser as recently as 18 months ago, the SBA has evolved substantially in terms of its recognition that complete and credible business appraisals are an important element of the “change of ownership” loan program. In fact, the new SOP specifically states that this is the case on page 185 of SOP50-10(5)(B):
�
“Determining the value of a business (not including real estate which is separately valued through an appraisal) is the key component to the analysis of any loan application for a change of ownership. An accurate business valuation is required because the change in ownership will result in new debt unrelated to business operations and create an intangible asset. A business valuation assists the buyer in making a determination that the seller’s asking price is supported by historic operations and permits the buyer to make a reasonable return on his or her investment.”
�
Surprisingly, this seemingly simple paragraph includes verbiage (signals) which help the appraiser to determine both the type of report which is required and the relevant standard of value. Because the SOP does not directly address these pivotal valuation issues, it is incumbent upon the appraiser to be aware of the proper valuation approach to use for this very unique appraisal environment (unique in the same way that matrimonial dissolution appraisals are unique).
�
In short, the recent changes implemented by the President and Congress as well as the SBA should lead to a substantial uptick in the number of the 7(a) program loans which require independent business valuations. Given that loan generation had already picked up substantially over the past three months, the remainder of 2009 and 2010 should see even greater loan volume – and greater demand for appraisal services.