For Immediate Release

Contact: Alisa Harrison 202-628-8000

WASHINGTON, Feb. 13, 2009—The International Franchise Association today urged the Small Business Administration (SBA) to reconsider a proposed change to financing guidance that will effectively eliminate the ability of many franchised small business owners to transfer or sell their company.

In a letter to the SBA, IFA Vice President of Government Relations David French said that at a time of economic uncertainty, the IFA is concerned that SBA’s proposed rule change would immediately devalue many small businesses by eliminating the ability of prospective franchise business owners to acquire financing for healthy businesses that are transferring to new ownership.  

Plummeting home values led to the current economic crisis, according to French. He noted that this policy change could radically devalue many businesses and threaten a similar crisis for existing franchised small businesses. Throughout its history, the SBA itself values businesses based on the historic cash flow and requires outside appraisers or bank internal appraisers to employ that method of valuation.

“This proposed rule change is disastrous at a time when our economy is shedding jobs and credit markets are frozen so that capital is hard to come by,” French said. “To effectively stop the transfer or sale of franchised small businesses would mean the additional and unnecessary displacement of employees and eliminate small business owners’ opportunity to obtain fair value for their companies.” 

The proposed Small Business Administration’s (SBA) changes to the Standard Operating Procedure (SOP) 50-10 revision 5(a) would cap the amount of goodwill financing at $250,000. For decades, the SBA’s 7(a) loan program has allowed lenders to utilize this “goodwill” difference between the value of the business and the value of the book assets in establishing a basis for a guarantee when collateral is an issue. The goodwill financing proposal in the SBA’s SOP would no longer allow for the transfer of the vast majority of small businesses to otherwise qualified new owners. The implications are far-reaching and likely will lead to a devaluation of small businesses across the nation. The value of a small business is based primarily on the cash flow it can generate and to a much lesser extent on the value of the assets it has on its books. Lenders know this and use anticipated cash flow as the key determinant of a borrower’s ability to repay the debt.

“We urge the SBA to rescind the proposal and return to the current policy so that franchised businesses can continue to grow and thrive,” French said.

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About the International Franchise Association
 The International Franchise Association, the world’s oldest and largest organization representing franchising, is the preeminent voice and acknowledged leader for the industry worldwide. Approaching a half-century of service with a growing membership of more than 1,300 franchise systems, 11,000-plus franchisees and more than 500 firms that supply goods and services to the industry, IFA protects, enhances and promotes franchising by advancing the values of integrity, respect, trust, commitment to excellence, honesty and diversity. For more information, visit the IFA Web site at www.franchise.org.

 

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