Small Business Administration updates SOP for the first time since 1999

Since January 29, 1999, the SBA has updated its Standard Operating Procedures (“SOP”) via various policy notices.  Over the past several months, the SBA staff took on a massive project, attempting to incorporate over 7 years of policy notices into an updated version of the SOP, while simultaneously reducing the volume. 

The modernized SOP 50-10 (5) replaces the last version and incorporates policy notices in effect through December 31, 2007.  In an effort to maintain the currency (pun intended…) of the SOP, updates are anticipated on a semi-annual basis.  The hope is to eliminate sporadic policy notices.  SOP 50-10 (5) is effective for loan applications received beginning May 1, 2008.  The new SOP is 380 pages vs. 849 pages of the previous version. 

One such clarification involves business valuations:

(i) Business Valuation

     (a) Determining the value of a business is the key component to the analysis of any loan application for a change of ownership. The need for an accurate valuation is true regardless of whether the financing is structured as an asset purchase or a business purchase.

     1.  For loans less than $350,000, a lender may do its own valuation of the business begin sold to identify whether the seller is requiring a price that is not supported by the business’s historical performance.

     2.  For loans of $350,000 or more, the lender must obtain an independent business valuation from a qualified source.

     (b)  In addition, a lender should require as much seller-financing as possible with the seller-financing having a subordinate lien to the SBA-guaranteed loan on the business assets.  A rule of thumb for the amount of seller-financing that should be required is the amount being borrowed by the buyer to finance the acquisition of intangible assets such as goodwill.

It should be noted, that when questioned in response to this modernization, SBA noted that they did not intend on changing the guidelines for business acquisitions and indicated a clarification on this issue would be forthcoming.  As of the date of this notice, clarification has not been received.

A few additional updates have also been noted:

· Assisted Living Facilities are now eligible for PLP Processing

· Mini-warehouses, office suites, shopping centers, flea markets, and mobile home parks are eligible if at least 50% of income is from services provided rather than rental (passive) income.

· Loan maturity may be up to the maximum for the asset class comprising the largest percentage of the use of proceeds.

· ESOPs and 401(k) Accounts used toward the purchase of business no longer require the guaranty waiver of central office so long as the beneficiaries provide unlimited guarantees.

Additional procedural changes and “minor” changes to the 7a and 504 programs, particularly relative to appraisals and collateral will be highlighted in upcoming posts.