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SBA's 'Goodwill' Cap Is Generating, Er, Ill Will
By Marc Tracy
Important news reported by Sharon McLoone over at our sister site, washingtonpost.com: a new Small Business Administration rule has capped, at $250,000, the amount that the agency will guarantee where someone who is taking out a loan in order to purchase a small business is looking to finance the acquisition of the existing business's "good will"--which is economist-speak for a business's non-tangible assets, such as its brand, as well as its cash-flow.
The actual cap is actually either $250,000 or 50% of the total loan amount. McLoone gives the example of someone looking to buy a business for $2 million, including a $400,000 down payment. While now (technically, the rule goes into effect on March 1) the SBA's uppermost limit would be the $250,000 figure, it previously would have been as high as $1.6 million. In other words, the rule all but ensures that fewer small businesses will be sold now.
What's the explanation behind this?
After all, SBA loans, particularly from its flagship 7(a) program, have plummeted, and the new stimulus package appropriated hundreds of millions of dollars to the agency for the explicit purpose of juicing these loans and getting small-business credit moving again.
Our best guess is that while the SBA wants to increase its lending, it and the federal government's main focus right now is in lending to existing small businesses so that they can most efficiently and quickly pay off their existing loans. That goal in turn serves the broader goal of buttressing the credit markets generally--hence the expansion of the agency's microloan program, which is specifically designed for small businesses with outstanding loans. While focusing on this, the agency is intentionally cutting back on lending designed for other purposes--such as making it easier for people to buy small businesses. Essentially, and with the larger macroeconomic situation in mind, the powers that be have determined that they would rather struggling small businesses move towards solvency, rather than move towards insolvency and a subsequent sale.
The problem with this, as McLoone is told by a business-broker (who is in the business of helping the sale of businesses--a job description that does not sound great in light of this new rule), is that, "Buying a business is a real option to a traditional job search. What happens [with the new rule] is the whole business acquisition market could come to a screeching halt." His Chicago-based firm's typical customers are apparently "middle- to senior-level managers in their 40s or 50s 'with lots of experience and a little nest egg who wouldn't have nearly enough money to pay for a business in cash,'" according to McLoone.
In other words, keeping the market for buying businesses open--as opposed to constricting it, as this new rule does--would effectively enlarge the labor market, which certainly doesn't sound so bad for an economy that is experiencing rapidly rising unemployment. So count us skeptical on this latest move.
Comments (2)February 26, 2009 4:26 PM
Comments (2)
That may well be true but wouldn't this also protect a buyer in as much as they can't finance as much "Blue Sky"? Yes, it would make it tough on the seller.
If a seller can't charge as much for the "Goodwill" factor it simply means that the sale only includes the real asset value of the business.
A lower, more realistic sales price would provide a safer loan for the SBA.
Posted by Ray Earhart | February 26, 2009 6:50 PM
Posted on February 26, 2009 18:50
Once again government intervention meant to contain downside risk is going to impede the natural economic process of small and medium sized businesses transferring to younger and more contemporary owners/operators. Many of these smaller businesses are for sale not because they are failing, but because their current owners are looking to retire. In many case these new owners bring fresh capital and energy to the acquired enterprise that leads to growth and new jobs.
Certainly bankers and the SBA are more comfortable loaning against tangible assets, but well established, well run, and profitable small businesses are primarily pursued because of their historic and future "cash flow". The SBA is acting in an understandable but damaging way that will have a negative impact on the small business commumity. This policy change is ill advised and needs to be reversed!
Posted by Jim Barron | March 2, 2009 9:09 AM
Posted on March 2, 2009 09:09