April 25, 2013
By Karen McHugh
A common area of confusion is in the arena of financing business acquisitions. The SBA rules surrounding a change of ownership transaction have evolved over time because this area of financing can be fraught with “missteps” by multiple parties (the lender, the purchaser/borrower, the seller, and the third party vendors). SBA has always held the position that there must be a reason for the transaction to occur. The change of ownership must either “preserve the existence” or “promote the sound development” of the business. (there There must be a benefit to the business— – not necessarily to the individuals involved.).
SBA also places special emphasis on determining the value of the business and states that this value is the key component to the analysis of the loan application. An accurate business valuation is required because it assists the buyer (your borrower) in making a determination that the seller’s asking price is supported by historic operations and permits the buyer to make a reasonable return on their investment. The business valuation puts the SBA loan amount into perspective. Is the amount you are financing reasonable in respect to the total value of the business?
Business valuations are required on both asset purchases and stock purchases. If real estate is part of the business acquisition, a going concern real estate appraisal may be used as the business valuation; however, the appraiser must be specifically experienced in valuating that type of real estate improvement, and all assets purchased must be itemized in the report (including intangibles) along with their individual value amounts.
Make sure to document your file with the appropriate information when loan proceeds are used to purchase an existing business:
1) copy of buy/sell agreement
2) copy of business valuation
3) pro-forma balance sheet for the business being purchased as of the date of transfer
4) copy of seller’s financial statements for the last 3 three complete fiscal years or the number of years in business (if less than 3 three years)
5) interim statements no older than 90 days from date of submission to SBA
6) If seller’s financial statements are not available, the seller must provide an alternate source of verifying revenues. The lender must discuss in its credit analysis:
a. Why why financial statements are not available,
b. How how the lender determined the business purchase price was reasonable, and
c. How how the lender verified business revenue.
7) Site visit of the assets being acquired (document file with date of site visits and comments)
Change of ownership documentation is also required when loan proceeds are used to refinance a note where the original use of proceeds was for the purchase of a business.
Think of us as your “go to” team for whatever needs you may have in the SBA lending world. We provide assistance at every SBA touch point from loan structuring to loan liquidation. To learn more about the all-inclusive SBA lending services of SBA Complete, go to www.sbacomplete.com or call us at 800-801-2378.