Specifically, the SBA has proposed new regulations that would limit the amount of goodwill financing to $250,000.
The new language is contained in Subpart B section 7(b) of the SBA's newest revision to its SOP 50 10 5(A). In SBA speak, SOP stands for "Standard Operating Procedures." They have a ton of them but SOP 50 10 5(A) defines operating procedures for SBA Lender and Development Company Loan Programs.
The language as currently drafted says the following with respect to SBA loans that involve goodwill.
- 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.
- 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.
- 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.
The second clause is the clause that is devastating news for America's small business owners. It punctures a big hole in one of the best wheels this pathetic economy has, the spirit of American entrepreneurship.
Goodwill, as you probably know, is the value of a business that can't be accounted for through physical things like assets in inventory in a warehouse. In other words, it's the difference between the price paid for a company acquisition and its fair market value.
As you can imagine, most businesses that are sold involve a significant goodwill component. The selling business owner has put years of work into building up the company. Their profit when selling a company is mostly in the goodwill value of the company, not in the brick-and-mortar assets that exist within the confines of the company's facilities.