March 5, 2009

Dear Fellow IBBA Member:

Like many of you, I have read about the recent changes regarding the Small Business Administration's (SBA) lending practices. My concern has kept me actively engaged as an advocate for the IBBA, and I have recently been appointed Chairman of the IBBA Government Relations Committee. This will allow me to continue doing what I was doing, but receive additional input from members and work with the IBBA Board of Directors on a path for the future. I am looking forward to working with my fellow committee members in representing the IBBA when contacting our legislators, the SBA and other groups, such as the National Association of Government Guaranteed Lenders (NAGGL) and the International Franchise Association (IFA).

I will continue to provide updates to the profession, and will share all of my communications with the IBBA, so we can make sure it is distributed and read by as many brokers and interested parties as possible.

First, let's make sure we fully understand what the SOP change that just went into effect really does. Some loans are still OK, and brokers performing those size transactions should understand the limitations and requirements.

1. A buyer acquiring a company whose goodwill loan allocation exceeds $250,000 cannot be approved without the entire package going to the SBA for review and their granting an "exception" to the goodwill cap rule. It appears that the lender has to fully underwrite the loan, and the borrower needs to have paid for that process and the third party appraisal(s). We expect very few transactions of this size will ever get that far. Why would anyone risk that expense without any guidelines which explain what makes an exception possible?

2. The Small Business Committee of the US House of Representatives, Chaired by Congresswoman Nydia M. Velasquez and Ranking Member Sam Graves, understand the negative impact on lending this change will create. They have sent a letter to the SBA Acting Administrator requesting they rescind this new SOP Goodwill requirement. This is very important, as, unfortunately, many in Congress just do not understand the effect of SBA ruling on small business lending. These people need to be thanked by brokers from within as well as outside of their district.

3. Smaller transactions can still be financed by the SBA program. There is no special cap placed on the closing costs, working capital, equipment, real estate and inventory. So, here is an example of a transaction and explanation of what could be financed for this transaction:

Assume a small manufacturing business has $340,000 in stable cash flow, and is being sold for $1.1 million. Included in the sale is $150,000 in equipment, $100,000 in inventory, and $300,000 in the real estate. A qualified buyer needs an additional $100,000 for closing costs and working capital. The total project is $1.2 million, and the goodwill is $550,000. If Mr. or Mrs. Buyer was injecting the normal 20% of the total transaction, or $240,000, and the seller will finance (at a ten year term) 10% or $120,000, the SBA lender could then finance the balance of the $840,000. They could do this, even though the Goodwill is over $500,000. That is because they could allocate the loan proceeds as follows: Real Estate: $300,000, Inventory, $100,000, Equipment $150,000, Closing Costs/Working Capital, $100,000 and Goodwill, $190,000. As long as the loan proceeds are less than 50% of the goodwill, but not greater than $250,000 it still meets SOP requirements.

If your lender does not recognize this (and many are just as paralyzed by all of this), email my office. We can help you with structures and with the appropriate lender who gets it. On the other hand, let's analyze a business with $400,000 in cash flow was being sold for $1.1 million which required $100,000 in closing costs and working capital. The assets are office furniture and office equipment, which might appraise for say, $50,000. The goodwill here is $1,050,000. So the maximum SBA
loan is limited to $250,000 for Goodwill, and the $150,000 for equipment and closing costs/working capital, or $400,000.

WHAT ACTIONS SHOULD THE BUSINESS BROKER PROFESSION TAKE

1. Presently, the SBA has an Acting Administrator, Mr. Hairston. Until Karen Gordon-Mills takes over as the new "permanent " Administrator, it will be more difficult to effect change. Nonetheless, we need to keep up the pressure, and be prepared to get our message to the SBA staff and administration, not only our Legislators.

2. The Government Relations Committee, which I now chair, will continue to monitor the situation. At this time the IBBA does not have a professional government relations staff, nor any budget for this kind of activity, but will investigate what it takes in a financial commitment to do anything of consequence.

3. I urge you, when contacting "Washington" to frame your concerns on the effect of the businesses, and the economy, not just your income. Emphasize that this Goodwill Cap prevents transactions that may save and/or create jobs in the economy. Remind them that without an exit strategy, individuals will be less motivated to take risks and either acquire a company or start new businesses or franchises. Candidly, the SBA cares very little for brokers. They also seem to have a negative opinion about business acquisition loans. To refute this, we need facts, not just outrage. I have been in contact with some well regarded SBA lenders, who are going through their files and compiling data, which they have agreed to share in order to refute the conclusion of some SBA
officials that business acquisition transactions have a higher default ratio than start-ups. I will share any information is developed which I receive, so you can quote statistics, not just your intuition.

4. I believe we should also take a pro-active stance and make business acquisition loans from IBBA members perceived as a better than the "rest of the herd". The committee will develop a set of Guidelines for IBBA members to follow. Of course, no one is required to follow these. But, what I hope we can do is create a set of guidelines, to which many IBBA Members will adhere. The IBBA Code of Ethics will provide the basis for many of these issues. I will be asking fellow members to join me in a delegation to the SBA office and to the National Association of Government Guaranteed Lenders to get feedback in the development of these guidelines from both perspectives. If any of you receiving this communication have any special input you wish to share with me, please do so via email.

Respectfully submitted,

Bernard Siegel, Ph.D., CBI
Chairman, Government Relations Committee
International Business Brokers Association