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SBA Loan Alert: Proposed SBA Changes
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From Siegel Financial, Bala Cynwyd, PA
Reprint from Siegel Financials Alert
SBA closing window for business acquisition loans
Siegel Financial has just learned that the SBA, in its infinite wisdom, has proposed changes to the SOP, effective March 1st that would make most business broker transactions ineligible for SBA 7-A loans. This is the killer...it limits the amount of SBA loan financing of goodwill to the lesser of 50% of the goodwill, or $250,000.
Although this issue is going to be responded to by NAGGL (National Association of Government Guaranteed Lenders),it is important that all business brokers take the time to reach out to their legislators. If these two provisions become effective on March 1, 2009, SBA lending for business acquisitions will be limited to a small portion of business broker transactions.
The new language effectively caps the amount of goodwill financing to $250,000. This language effectively eliminates an entire class of businesses that are sold in order to affect succession, and keep employees working.
Small businesses are valued on a multiple of cash flow, and lenders provide debt financing based on the company's ability to repay the debt. The SBA 7(a) program is designed to allow lenders to have a guarantee when collateral is an issue. Businesses that are sold by intermediaries, accountants, attorneys, and business owners all have relied on this program for decades to provide the vehicle for them to have an efficient succession plan. "Closing the doors" or providing seller financing does not allow for a healthy transfer of the business to a new owner.
Goodwill, as it stands in the "space" is defined by the value created by the cash flow of the business, less the tangible assets. Large businesses are valued on cash flow, public companies are valued on cash flow, and lender loan covenants are based on cash flow. Why then, would the SBA add language to the SOP eliminating the ability to get financing for healthy businesses that are transferring to new ownership (many of whom may be displaced employees right now), allowing for the business to thrive with fresh insights, and the seller to have a healthy retirement?
This change will eliminate an entire class of Americans from attaining the very thing that they risked everything for when starting a business! Additionally, there are thousands of intermediaries who will be forced to seek other venues for employment, all with the stroke of a keyboard! With the government bailing out everyone else, why in the world would the SBA eliminate the ability for a good business to be sold?
At present, the SOP change limiting the amount of financeable goodwill to $250,000 will not go into effect on March 1, 2009. It is expected that the implementation date will be delayed until August 1, 2009.....ostensibly to give the SBA time to discuss this issue with knowledgeable parties.
It is important that all business brokers and intermediaries use this time to keep the pressure on Congress and the Administration. I included the administration because the SBA does not necessarily require Congressional approval for SOP changes, as long as they are within any Congressionally approved guidelines or regulations. Nevertheless, Congress can exert pressure on the administration and on the SBA itself to forget the proposed change altogether. We need to make sure that happens.
Historically, this is what happened in 2008 with the original proposed SOP change to require the seller to finance all the goodwill in the transaction. Due to an uprising of objections, the implementation was delayed, and eventually this proposed SOP change was killed.
The SBA will have an online business chat on Thursday, March 19, 2009 at 1:00 p.m. ET at http://app1.sba.gov/liveMeeting/mar09. The host will be Mr. Eric Zarnikow, Associate Administrator for the Office of Capital Access at the U.S. Small Business Administration. The website also has a place that you can submit a question to be answered in the chat.
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Current Economic Climate Maybe Beneficial for Gifting for Estate Planning |
The recession has been officially declared. While the depth and length of the current recession is laden with uncertainty, what is certain is that as of the first of December 2008 the major stock indexes were down 40% for the year.
With the current economic climate, privately held businesses could be worth less. For those dealing with an estate tax issue from within the last year, consideration of the alternate valuation date may prove beneficial for the estate tax filing process.
For the past 35 years, Business Evaluation Systems has performed thousands of appraisals for estate purposes. We work for some of the finest law firms, accounting firms and financial planning firms in the nation and are known for our excellence. |
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Bill Introduced May Limit Family Limited Partnership Discounts |
| January 16, 2009, Reprint from Bracewell & Giuliani LLP, News Publication
Last week, Rep. Earl Pomeroy (D-ND) introduced H.R. 436 . The Bill would fix the federal estate tax exemption at $3,500,000, and set the tax rate for estates exceeding that amount at 45 percent (50 percent for estates between $10 million and $23.5 million). The Bill also seeks to strike a major blow at a popular estate planning technique by eliminating most discounts associated with family limited partnerships. We are strongly encouraging our clients that have family limited partnerships to contact us to evaluate whether to make transfers now.
Under current law, when an individual transfers a partnership interest, whether by gift or at death, the partnership interest is valued at the price that a willing buyer would pay for the partnership interest. Since family partnership interests are not publicly traded, and do not represent a controlling interest in the partnership, business appraisers often assign substantial discounts in valuing these interests. For example, a 10 percent limited partnership interest in a partnership that holds $1 million worth of securities would not be valued at $100,000 under current law.
Instead, because a buyer of the partnership interest cannot sell the interest on the open market, and cannot control how the partnership assets are invested, he or she would pay less for the interest (perhaps $60,000 or $65,000). These valuation discounts are often utilized by estate planners to shift wealth to family members, whether by gift or at death, in a tax effective manner. These valuation principles apply to any non-publicly traded entity.
If HR 436 becomes law, appraisers would not be allowed to apply any discounts to "non-business" assets held by partnerships or other entities. Instead, those assets would be valued as though they were transferred directly to the recipient. In the foregoing example, if the $1,000,000 held by the partnership were cash or marketable securities, a 10 percent interest would be valued for gift and estate tax purposes at $100,000, even if a willing buyer might pay only $60,000 for the interest. In addition, if a family controls an entity which is not "actively traded," in contrast to current law, no discounts will be allowed for the transferee's lack of control of the entity. |
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2009 - Year of Opportunity |
Houston, Texas
As of January 2009, many banks and non-bank lenders are caught in a 'liquidity trap' where they must fix their own balance sheets before they can resume lending to customers. Getting buyout financing is harder than ever and new loans are secured by both cash flow and hard assets. On Wall Street, there's a big slowdown in mergers & acquisitions.
Wall Street's train wreck is Main Street's opportunity. Smart business owners and their advisors will certainly use these changes to their advantage. Here are some ideas for owners considering a capital transaction in 2009:
1. Cash is king. Instead of an illiquid investment in a private company, this is probably a good year to have cash. Consider a buyout or recap if you have another use for money. There are many opportunities in financial investments and real estate, for example.
2. Debt is cheap. For borrowers that qualify, interest rates are as low as they have been in a lifetime. If you have good credit and debt-free assets, consider recapitulation with low-cost debt. Ask for an estimate of your secured debt capacity.
3. Taxes are low. Regardless of your political persuasion, it looks like taxes will go up - maybe as early as this year. We certainly don't know the outcome, but if the tax on gains goes back to the old rate, then a deal now is worth 18% more than a deal later. After taxes, you could keep more today than you might get by waiting for a better market someday.
4. Owner financing is back. Owner financing was risky back in the days of over-leveraged buyout's. In today's under-leveraged buyout's, the owner can take the place of last year's bank loan. Instead of getting cash and then buying an annuity, you can more than double your retirement income with a tax-deferred note.
5. Value is relative. Even in a down market, there are always investors looking to invest in good companies. These well-capitalized buyers do deals in good times and bad. If your business is flat when everyone else is down, you might be the most attractive company in your industry.
6. Get paid twice. Don't sell it all when the market is down. Sell up to 80% and keep the rest. As the business grows and pays down debt, the part you keep can be worth as much as the part you sell. Ask an advisor about this 'second bite of the apple' transaction.
In summary, there's no such thing as a bad time to do good business. Now more than ever, it's important to talk with an experienced advisor - one that has done many transactions in both good and bad times. Consult your advisor to discuss these and other ideas for a successful capital transaction in 2009.
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Professional Versus Practice Goodwill |
The distinction between professional goodwill (sometimes called personal goodwill) and practice goodwill (sometimes called business or commercial goodwill) is that professional goodwill is associated primarily with the individual whereas practice goodwill is associated primarily with the entity. This can be demonstrated by assuming John Smith, CPA, is a partner at Pricewaterhouse-Coopers. If a new client calls the firm specifically requesting John Smith, then, there may be personal goodwill associated with the individual. However, if the client wants a "big five" name on the financial statements, contacts Pricewaterhouse-Coopers and ends up with John Smith, there are probably practice goodwill involved. Sometimes, the two types of goodwill will overlap.
The existence of professional goodwill is based on the fact that clients come to the individual, as opposed to the firm. This implied assumption is that if this individual moved to another firm, the clients would go with him or her. Professional goodwill is more difficult to transfer to a new owner, but not impossible. Generally, the professional will assist in a smooth transition to a new owner in order to obtain the maximum price for the practice.
Goodwill in a Professional Practice.
The issue of personal versus professional goodwill arises most often during the divorce valuation of professional practices. In most instances, there is little reason to separate the two concepts. However, some courts have determined that a sole practitioner in any profession can only have personal goodwill since he or she is the practice. The sole practitioner's practice can easily have both forms of goodwill.
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Are fairness opinions really fair?
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A new rule proposed by U.S. brokerage regulator NASD would require greater disclosure to shareholders about the relationship between their company and an investment bank providing such an evaluation of a deal.
The U.S. Securities and Exchange Commission is reviewing the proposal.
Many shareholders fear a conflict of interest when an investment banker provides a fairness opinion on a merger involving a company with which it has other business relationships.
Shareholders can go to court if they feel a transaction is not in their interests, but many would like to take pre-emptive action by making sure they get genuinely fair advice on a deal's valuation in the first place.
More deals are now likely to undergo a second or third fairness opinion to keep shareholders happy, experts say.
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Why Rules of Thumb Don't Make Sense - When Determining the Value of Any Business |
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By George D. Abraham
Here is an example of why "Rules of Thumb" do not work for properly valuing businesses.
Case Study: Two separate McDonalds franchise restaurants.
McDonalds #1
Fort Worth, Texas
Annual Sales: $1,800,000
Pre-Debt Cash Flow: $200,000
Location: Near Stock Yards
Population/Projected Growth: Flat
Restaurant Capacity: 50 People
Condition of Restaurant: Several years old, needs a new roof
Franchise Fee/Monthly: $4,500 and due for renewal
Visibility: Partially Hidden
Parking: Small lot/Limited Drive-Thru Space
High School: None
McDonalds #2
Dallas, TX
Annual Sales $1,500,000
Pre-Debt Cash Flow: $150,000
Location: Near a Lake Front Community
Population/Projected Growth: Increasing (growing community)
Restaurant Capacity: 80 people
Condition of Restaurant: Four Years Old/Practically New
Franchise Fee/Monthly: Renewal $2,500 - Renewal in 10 Years
Visibility: Wide Open/Easy to See
Parking: Ample w/RV Parking & Truck Drive-Thru
High School: Nearby
Typical Rule of Thumb would dictate that the business with the highest cash flow wins.
There are three different rules of thumb for restaurants - all of them would look specifically at gross sales and/or cash flow.
Now which one do you think should win? This is why rules of thumb cannot be used when valuing ANY business. They do not consider all factors intelligently. |
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In The Wake of Hurricane Ike |
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By George D. Abraham
With the purchase of good generators we were running at 100% the following Monday after the hurricane. As generators became extremely scarce many companies could not open their doors for weeks.
Our office is about 20 miles north of Galveston but it was weeks before electrical service was restored to the Houston Area and much longer for Galveston.
Galveston Tragedy
Estimates are that 60% to 70% of the structures in Galveston will be condemned. With few students returning to school, property values down and so many of its residents forced to live elsewhere, the city's income is down at a time when it has to spend an enormous amount to clean up and recover, but our hats are off to you Galveston as, even in the Face of Downtown Devastation, Wreaked by Hurricane Ike, the 34th Dickens on The Strand was held the first weekend in December.
It is our belief that Galveston will recover and emerge as a real jewel on the Gulf Coast.
(Galveston Strand District Post Ike)
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What Makes Business Evaluation Systems Your Best Choice for Your Clients? |
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For the past 35 years Business Evaluation Systems has been involved in the appraisal of over 16,000 firms ranging in value from $50,000 to over $7 billion, both on a National as well as on an International basis. Our experience has qualified us to meet the requirements of the Appraisal Foundation, Internal Revenue Service, Lending Institutions and Courts of Law around the country. With Area Representatives in almost every state and city, we can provide a business valuation of a complete company at extremely reasonable rates. Some of the reasons we value businesses and ownership Interests are:
- Estate Planning for Gifts or Inheritance
- Institutional Financing
- Buying or Selling a Business
- Marital Dissolution
- Buying Out a Partner or Shareholder
- Litigation Support
- Litigation Issues involving Economic Damages, Loss of Profits or Bankruptcy
- Allocation of Purchase Price among Tangible and Intangible Assets
- Taxation Issues for Probate or Federal Estate Taxes
Machinery and Equipment Appraisals Worldwide
Licensed and Certified Machinery and Equipment Appraisers with International Experience
- Collateral Financing
- Insurance
- Business Appraisal Accuracy
Click here to read the full article on our
nomination in H Texas Magazine:
2007 Professionals on the Fast Track - H Texas |
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Let our knoweledgable team assist you. Call us today!
Sincerely,
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