SBA's 'Goodwill' Leaves Bad Taste for Small Businesses
Thursday, February 26, 2009; 9:09 AM
The business brokers, who guide buyers and sellers of companies through those transactions, say a new government rule could dramatically harm their businesses while blunting the ability of many recently laid-off Americans to find new avenues of work and income.
Their concern stems from a new rule by the Small Business Administration that tightens bank lending at a time when the White House is seeking to uncork it.
The agency this month notified banks offering its most popular loan program, that effective March 1, the SBA will limit "goodwill" financing to 50 percent of the loan amount or a maximum of $250,000. The SBA does not directly lend money to small firms, but works with partner banks to offer a variety of loan programs that the agency partially guarantees.
Goodwill, sometimes referred to as "blue sky" in the business world, is the value of a business that can't be accounted for through physical things like assets in a warehouse or a printer's printing press. It's the brains and cash flow of a company.
The SBA's new rule means that if a buyer is interested in purchasing a $2 million firm and is asked to come up with a 20 percent down payment, or $400,000, the SBA would be able to provide a qualified buyer $250,000 under the new rules for the goodwill portion of the company's value. Previously, it could have offered as much as $1.6 million on that particular deal, according to Don Naideck, president of business broker Prime Investments in North Bethesda, Md. The firm works to sell businesses in the Washington, D.C., area valued from $1 million to $5 million.
"One of the main purposes of the SBA was to allow people to buy a business who might not qualify for a traditional loan, but now if you want to buy a $2 million business and your house only has $500,000 in equity, that's not enough," he said. Naideck also said he's concerned that the rule will jeopardize his business by shrinking its pool of qualified buyers and may even put some lenders out of business.
The SBA has been flooded with concerns from across the small business community and told washingtonpost.com Wednesday that they plan to revisit the goodwill limitation in light of lenders' complaints that the $250,000 ceiling is too low and is aiming to issue new guidance soon, said an SBA spokesman.
Paul Merski, senior vice president and chief economist with the Independent Community Bankers of America in Washington, D.C., called the goodwill cap "arbitrary and random." His group, which represents 5,000 community banks nationwide, has spoken with the SBA about its concerns.
"The last thing we want to do in this economic environment is to put arbitrary caps where you're hurting the growth of the small business sector," Merski said. "This is not a provision that is extremely well thought-out in the current environment to have capital flowing and supporting lending to small businesses."
"The SBA's goodwill cap eliminates a very important source of financing in the businesses-for-sale marketplace," said Gaebler Ventures President Ken Gaebler, whose Chicago-based firm helps grow small businesses. "The result is that it will kill a lot of deals for buyers who have offers on the table."
The National Association of Certified Valuation Analysts predicts that over the next 18 months more than 1 million privately held businesses will change hands.
Naideck said that if people looking to exit a business are unable to sell it, that business likely will be shut down. "There are healthy businesses that could have been kept alive. It's a loss to the U.S. economy," he said.
Domenic Rinaldi, who was informed of the SBA change from a banker, said his business-broker firm has seen buyer inquiries triple this year to well over 200 a month. The spike, he said, is due to more people "in transition" who have recently been laid off due to the recession.
"Buying a business is a real option to a traditional job search," said Rinaldi. "What happens [with the new rule] is the whole business acquisition market could come to a screeching halt." His Chicago-based firm, Chicagoland Sunbelt, specializes in the sale of businesses of all sizes and deals with SBA-guaranteed loans daily. Chicagoland's buyer profile is 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."
Rinaldi also said that with home equity lines of credit virtually dried up, entrepreneurs will be in the position of trying to find other sources of capital. "If sellers are really motivated to sell, they will be put in the position of being the bank and buyers may have to borrow from friends and family or drain their 401(k) accounts," he said. Those are all things I don't think that the government wants to see happen."
Naideck said SBA's move makes it look like the agency wants the sellers to act like financiers, but "from a seller's point of view, if they still have the risk of collecting the money, they'll think 'Why should I sell it in the first place?'"
Several business brokers praised other new government policies, such as provisions tucked into the recent economic stimulus package. Gaebler lauded the law's language allowing the SBA to raise its loan guarantee from current levels to as much as 90 percent for some loans, but said "this latest, new rule negates some of those provisions and... doesn't offer much respect to the small business economy, especially when you consider the big role that small business plays in an economic recovery."