SBA AND THE BIZ AQ L OAN —DOCUMENTING CHANGES IN OWNERSHIP Coleman Webinar Friday, January 25, 2013 2:00 PM ‐ 3:15 PM EST
SBA AND THE BIZ AQ LOAN — DOCUMENTING CHANGES IN OWNERSHIP
Coleman Webinar Friday, January 25, 2013 2:00 PM ‐ 3:15 PM EST
Coleman Report Industry Discussion
Bob and Charles Show 1:50 - 2:00 PM ET. We are featuring a complimentary small business lending industry discussion with Bob Coleman, Editor of the Coleman Report and Charles Green, Author of The SBA Loan Book: Bestselling book on SBA-guaranteed financing. This discussion will start at 1:50 PM ET and end at 2:00 PM ET.
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• Send an email to [email protected]
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webinar. • We will issue e‐certificates of participation at the conclusion of the
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Expert Panelist
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Lisa G. Lerner Owner, Member Enhanced Consultive Solutions, LLC ("ECS") Ms. Lerner's professional experience spans over 28 years in the financial arena, with strong expertise in Small Business Administration lending, most recently operating ECS since 2004. ECS is an agency (SBA) approved lender service provider and provides guidance, and technical support to small and mid- size lenders. She and her husband, Nelson, are also certified pet therapy teams with their dogs volunteering with the nonprofit organization, Gabriel's Angels- "Pets helping kids."
BUSINESS ACQUISITIONS & PARTNER BUYOUT AND THE SBA LOAN Essential considerations for this lending opportunity
In association with COLEMAN PUBLISHING
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But first, a word of caution…….
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Potential revenue generating opportunity however tread carefully as SBA reviews this type of transaction very closely! (& with good reason)
A change of ownership is considered a “NEW” business.
COMPLETELY DOCUMENT CLEAR & JUSTIFIABLE reason(s) for change of ownership.
Some areas we will discuss today include:
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Business valuation Site visit Real estate appraisal What analysis to include in the request and credit
memo Intangibles Equity injection and MORE …
Applicable Circumstances….. 9
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What’s a buyer to do? BUYER must not be
an individual BUYER must
purchase 100% of the stock. NO PARTIAL transactions.
Stock redemption rule
Applicant business to purchase stock of either departing owner(s) or all stock of all existing owner(s) Asset purchases are still allowed.
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What’s a seller to do?
Seller may NOT remain as an officer, director, stockholder, key employee or any other such position…… EXCEPT AS AN OUTSIDE CONSULTANT….
ONLY FOR A MAXIMUM OF
12 MONTHS! NO EXCEPTIONS
ONLY FOR A MAXIMUM OF
12 MONTHS! NO EXCEPTIONS
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Should a Seller stay on as a consultant:
Purchase agreement or separate document should outline specifics to document the relationship during transition/training period.
NOT TO EXCEED 12 months!
Purpose: To document that the seller is not considered an “associate”.
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Key items to review & include in the application to SBA for BIZ ACQUISITION
Buy Sell / purchase agreement
Business valuation Pro forma balance sheet Last three years
financial statements from seller
Interim financial statement (at least less than 90 days old)
Lender determination documentation that purchase price reasonable
How Lender verified business revenue
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SBA Guidance on change of ownership…and who signs the note? “Change of ownership A stock purchase may be used to
effectuate a change of ownership in a going concern. This method may be used where (1) the corporation redeems or repurchases all outstanding shares from existing shareholders, or (2) a third party buyer purchases all outstanding shares from existing shareholders. In either case, certain documentation is required at loan closing:
The buyer(s) and corporation must sign the note; The principals of the buyer will be required to guaranty the loan; and The Lender should obtain an opinion from the Borrower’s or Lender’s counsel that the transaction complies with state law and specifying that adequate consideration exists and that the corporation cannot deny liability for the debt for failure of consideration.”
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The PURCHASE CONTRACT
READ CAREFULLY
What is being purchased?
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IF purchase price includes intangibles over $500,000, equity injection must be at LEAST 25% of the purchase price IF to be submitted under delegated authority. IF less than 25%, submit via STANDARD 7(a) procedures
Purchase price to include ALL assets being acquired!
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INTANGIBLES may be a part of the purchase
Intangibles (continued)
IF loan proceeds used to finance intangibles, amounts must be specifically identified in use of proceeds sections of the credit memo, SBA loan authorization
VALUE of intangibles: Book value from balance
sheet Appraisal Or Business valuation
amount less the working capital assets & fixed assets being purchased
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Purchases that include payoff of seller notes
If existing debt includes a SBA loan with the same lender, the request MUST be submitted to the LOAN GUARANTY PROCESSING CENTER as a standard 7a package & NOT via a PLP (or any other designated status).
IF a complete change of ownership includes an existing SBA loan, the option to ASSUME the debt should be offered to the buyer! …depending on the loan terms, of course!
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Has the business been transferred within 36 months of the date of the loan application?
If so, further due diligence is PRUDENT!
FURTHER action required also if the loan request is over $250M & real estate included.
APPRAISAL REVIEW
Complete a site visit! If not, include a prudent & credible reason why not.
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EQUITY INJECTION Must NOT be
borrowed! UNLESS: Borrowed equity from
seller on FULL standby
or
PROVEN ability to repay the borrowed equity from NON BUSINESS applicant funds
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Equity injection (cont’d)
HOW MUCH?
What type?
AGAIN…..what is DEFINED AS “PRUDENT”?
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Guidance directly from SBA! “Equity injection
Lenders should document equity injection at the same time they document the use of proceeds –at closing. The Lender must not disburse a loan until it has proof of any required equity injection.
Proper evidence of a Borrower’s equity injection may include the copy of a check together with proof it was processed or a copy of an escrow settlement sheet with a bank account statement showing the injection into the business prior to disbursement. A promissory note, “gift letter,” or financial statement generally are not sufficient evidence.
Lack of proper and complete documentation of an equity injection required in the Authorization is one of the most common reasons for a reduction or denial of SBA’s guaranty at the time of purchase. If a Lender overlooks this requirement at the time of closing, the Lender usually finds it very difficult to adequately document equity injection at a later date.”
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BUSINESS VALUATIONS
A KEY COMPONENT
IF financed amount for intangible assets is to be less than or equal to $250M, lender may complete its own valuation & must use same methods as used for non–SBA loans. Credit memo must contain a thorough valuation analysis explanation. IF financed amount for intangible assets is to be over $250M, OR if a close relationship exists between buyer & seller, AN INDEPENDENT BUSINESS VALUATION from a QUALIFIED SOURCE is required!
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WHAT IS A QUALIFIED SOURCE?
…is an individual who regularly receives compensation for business valuations and is either…
A CPA that performs valuations in accordance with statements published by the American Institute of CPA’s or
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Qualified source for business valuations (cont’d)
Accredited by one of the following: Accredited Senior Appraiser,
American Society of Appraisers
Certified Business Appraiser, Institute of Business Appraisers
Accredited in Business Valuation, American Institute of Certified Public Accountants
Certified Valuation Analyst, National Association of Certified Valuation Analysts
Accredited Valuation Analyst, National Association of Certified Valuation Analysts
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Business valuation (cont’d)
To be requested by and prepared for the lender.
If submitted as a NON PLP package, valuation to be included with application
Going concern appraisal allowed if:
Special use property Appraiser experienced in the particular industry Appraisal breaks down values to each component of business
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Appraiser to identify…
Scope of work Requested by &
prepared for lender What is included in
the sale Opinion of value
Qualifications of valuator
Valuator signature certifying info contained
Note: cost of valuation may be passed along to borrower.
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NO “piggy back rides”
Definition: When one or more lenders provide more than one loan to a borrower at or about the same time, for similar purpose(s) & where SBA loan is junior position to other loans
PIGGY BACK LOANS ARE NOT ALLOWED! Of concern since business acquisitions may include multiple loan sources. Keep a watchful eye to avoid this scenario.
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TERMS of the “BIZ ACQ” Loan
Maturity: maximum is 10 years UNLESS the LARGEST portion of the assets includes real estate which allows for 25 year maturity.
Other terms & guidelines are the same as any other 7a loan.
For future reference, see on and around page 156 of SOP
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Business acquisitions that include a real estate component Separate real estate appraisal from business valuation. Appraisal report must be
prepared in compliance with UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE (USPAP) can be either a self contained or summary appraisal & addressed to lender
Independent, no appearance of conflict of interest
State licensed or state certified except if property estimated value over $1,000,000, then appraiser must be state certified.
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SBA Guidance on real estate appraisals…
“A Lender may accept a SELF-CONTAINED APPRAISAL REPORT or a SUMMARY APPRAISAL REPORT however, a RESTRICTED APPRAISAL REPORT is never acceptable for an SBA-guaranteed loan. An acceptable appraisal will: Identify and describe the real property Identify the interest being appraised and include the legal description and known encumbrances State the purpose and intended use of the appraisal Define the value (cost, income or comparable sales) to be estimated State the dates of the appraisal and report Identify all assumptions and limiting conditions Specify how data was collected and reported
Describe the information considered, procedures followed, analysis, opinions and conclusion Provide the appraiser’s opinion of highest and best use, when appropriate Explain the exclusion of any usual valuation method Provide any additional information that may be appropriate Have the signature and certification of the appraiser and include a disclosure by the appraiser of any involvement or relationship with the owner.”
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Tax Transcript verification Seller’s tax returns are to verified with what was provided to the IRS. IF not possible, verify in another method & carefully document.
Sole proprietorship: verify Schedule C
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Standby agreements
Can be considered equity injection IF AND ONLY IF on full standby (interest and principal) for at least a period of two years
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504 loans
Loan proceeds may be used to acquire long term fixed assets in conjunction with a change of ownership as long as:
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1. Jobs will be retained as a result 2. The project meets one of the community development or public policy goals.
504 loans (cont’d)
Project costs must not exceed the value of the 504 eligible fixed assets.
Loan proceeds are not to be used to purchase stock or short term assets.
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Franchise transactions
Verify Franchise is SBA eligible
Utilize the franchise registry
http://www.franchiseregistry.com/brand_info/
http://www.franchiseregistry.com
http://www.franchiseregistry.com/for_lenders/
FRANDATA.COM
On SBA SITE: “Franchise Findings
SBA attorneys have assembled a listing of Issues of Eligibility they have identified in various franchise/license/dealer/jobber or similar agreements (Agreements), which SBA calls Franchise Findings. This list contains the names of those franchises and systems that have requirements in their Agreements that could cause the business to be ineligible for SBA Financial Assistance. ……………………. This list is only a guide and is not a substitute for a full review of the Agreement……”
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Standard 7a and PLP submissions
PLP lenders can submit via standard process and must submit via standard process in certain circumstances.
Any lender with an executed 750 agreement can submit to the Standard Loan Guaranty Processing center, Small Loan Advantage also available to any lender with an executed 750 agreement for term loans of up to $350,000.
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The 159 form… For both 7a & 504 loans Fees charged by an agent clearly defined & have a necessary & reasonable relationship to services performed!
If over $2,500.00 must
be itemized, documented clearly
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The Eligibility Questionnaire
Eligibility
questionnaire for standard 7(a) guaranty.
Requirements are the same for PLP lenders
Change of Ownership
Addendum F
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Arm’s length transactions
How to determine? How to mitigate if
transaction does not appear to be at “arm’s length"
NO APPEARANCE OF CONFLICT!
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Credit memo considerations For your later reference, be sure to review SOP pages 180 – 186 for all required points in the credit analysis. EXPLAIN the reason for the change of ownership & why and how the business will benefit.
Cash flow! Cash flow! All available collateral, if not one to one. Site visit!
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SBA Submission guidance
Refer to SBA’s ten tab
submission format
Via SBA website “E tran” “Send this file” Yup…you can still mail or even fax!
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Documentation considerations Verify business
valuation, real estate valuation clearly explained in credit memo.
Be sure change in ownership benefits the business & documented clearly.
If partner buyout, verify ownership percentages before and after
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Loan Disbursement considerations
One 1050 form at closing
Attach proof of how proceeds were disbursed to this form
TRUST BUT
VERIFY!
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Keep perspective! Some reminders to ask yourself & your colleagues: Does it all make sense? What is the biggest impact? What is the worst case scenario?
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In conclusion…KEY POINTS
Valuation IS KEY!!! CLEARLY define
reason for change
Address intangibles
100% change in ownership…AND VERIFY!
Watch for any appearance of conflict. Example: seller not to be an “associate”.
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Thank you for tuning in…
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Lisa G. Lerner, Enhanced Consultive Solutions, LLC Helping you achieve your SBA lending goals
Loan Administration/Expertise in SBA Lending
[email protected] 602 684 5521
In association with COLEMAN PUBLISHING, INC.