April 2009 Franchising World
The proposed rule change would immediately devalue many small businesses. (After this article was prepared, IFA met with the U.S. Senate Small Business Committee and SBA policy staff to craft a compromise on goodwill financing. SBA indicated it will consider an alternative policy from IFA.)
Changes announced to the U.S. Small Business Administration policy guidance on the financing of goodwill do little to resolve the concerns of the franchise business industry, and only add more confusion and uncertainty during a time of economic crisis, the International Franchise Association said recently.
Responding to the announcement by the SBA that it will consider loans that are larger than the previously announced cap of $250,000 on a case by case, IFA said this stop-gap measure falls short of accommodating its concerns outlined in a letter to the agency. In announcing the new guidance on goodwill, the SBA observed that it lacks specific data on goodwill valuation. Data will be collected by the agency through August as a basis for further changes.
“This is a classic case of shooting first and asking questions later,” said IFA Vice President of Government Relations David French. “It is clear that this announcement was rushed through the decision making process with little thought given to its consequences. Under this policy, potential buyers of small business will essentially have to roll the dice in applying for a loan. This isn’t Las Vegas. This is Washington, and our regulators should be far more mindful of the impact of vague policy decisions on the small-business community.”
In the letter to the SBA, French said the 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. IFA requested the SBA rescind the new policy and revert to the previous policy.
“We again urge the SBA to use the previous policy so that sales and transfers can go forward, and small businesses can continue to grow, thrive and remain a critical part of our economic infrastructure,” French said. “Proposing policy without clear guidance does nothing but add fear and confusion to a marketplace that is suffering from low confidence and trust in lending policies.”
The previously-proposed SBA changes to the Standard Operating Procedure 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 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.