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SOP 50 10 5 (A) and Its Implications for Business Appraisers by Brendan J. Kennedy, CPA/ABV/CFF, CVA, ASA and Travis Smith On March 1, 2009 the Small Business Administration released revisions to current lending policies titled SOP 50 10 5(A). In the mix of an economic crisis, these revisions have already and will continue to have a significant impact on business owners, lenders, and business appraisers alike. Therefore, it is important for business appraisers to understand the implications and opportunities that arise from these new regulations. Within the expansive and detailed document there are two particularly important revisions to take note of. One, is the imposed change in the amount of goodwill being used in SBA loans. Second, the revision of requirements on SBA loan appraisals. The first change, the revision to goodwill, has been widely discussed and could significantly change lending to small businesses. In the SOP there are three rules outlined that specifically address goodwill, they are: (1) If the purchase price of the business includes goodwill (or "blue sky"), the lender should explore seller-financing with a subordinate lien to the SBA-guaranteed loan. (2) The lender may finance a limited amount of goodwill. In no event may the amount of goodwill financed by an SBA guaranteed loan exceed 50% of the loan amount up to a maximum of $250,000. (3) If any of the loan proceeds will be used to finance goodwill, the amount must be specifically identified in the Use of Proceeds Section of the Authorization. Of the three main rules, rule two is what has been controversial and concerning to lenders, brokers, & buyers. It effectively puts a cap on the amount of goodwill that can be financed in a transaction at $250,000 and will not allow for goodwill to exceed 50% of the loan amount (not the sale price). This has caused many to worry that the amount of loans and funding will drastically decrease as there was previously no restriction placed on goodwill financing. Since goodwill can be such a broad term, understanding exactly what goodwill is defined as in this situation is important, as such the SBA has officially defined it as “the selling price minus the sum of the book value of all assets being purchased”. Also, if the sold business has licenses, patents, or other intangibles listed on the seller’s balance sheet they may be subtracted from the selling price at book value to lower the amount of goodwill being financed. For small business loans this effectively means that the selling price less all listed and identifiable assets must not exceed $250,000 or 50% of the loan. An example to illustrate is a business with a selling price of $500,000. It has tangible assets of $200,000 giving it a $300,000 value allocated to goodwill & intangibles. The business also has an intangible asset, in this case a trademark, worth $125,000. In this hypothetical situation $175,000 of the loan (500,000 less 200,000 less 125,000) can be financed towards goodwill, assuming that the loan amount is $400,000 (80% of sale price) or more.

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