20 Nov 5 SBA Changes That Will Impact Your Clients
In our recent Business Brokerage Press “Tools of the Trade” webinar entitled “Acquisition Financing Updates with Steve Mariani”, we discussed some significant changes that will impact business brokers and M&A advisors looking to assist clients with acquisition financing. Mariani detailed 5 major changes to be aware of. The complete webinar is available here.
In terms of earn outs, Mariani pointed to several key facts. He noted that earn outs are commonly used for fast growing companies, as well as just secured new and larger contracts. Additionally, earn outs are used to reduce down payment and lower overall buyer exposure.
Forgivable promissory notes are limited and cannot be credited toward D/P. In fact, promissory notes are removed for BV calculations and are removed from the D/P calculation. In short, promissory notes ultimately must benefit the buyer.
There are also changes to minority partners. He notes that Paragraph A: Guaranties: Formerly 4., “Reducing Ownership Interest,” has been deleted. The reason behind this is that this section was causing notable confusion regarding partial changes of ownership.
Mariani noted, “It is the SBA’s intention that for an SBA loan being used to finance a complete change of ownership, the seller, who no longer has any ownership in the business, is not required to provide a guaranty
Additionally, for 7 (a) loans for partial changes of ownership, SBA will measure percentage of ownership post-sale for the purposes of determining who is required to provide a guaranty. As Mariani points out, investors usually do not want to provide a full guaranty and are keen to limit their exposure to only the equity injection.
Many of these changes can have a significant impact on your clients, so it’s important to stay on top of these developments.
There are also structure adjustments when including commercial real estate (CRE) that need to be factored in. The previous rules concerning CRE stated that when included in a business transaction, if 51% of the loan proceed were allocated to the CRE purchase, then the entire loan had a maximum maturity of 25 years. Under the changes, it is now that 51% of the purchase price must be CRE in order to receive a 25-year loan.
Mariani noted, “Today it demands that on any acquisition that includes CRE under 51%, the maximum loan maturity can only be 10 years.” Clearly, these are substantial changes worry of note.” Mariani further points out that one implication is that it is possible to have a 10 year loan on the business and a second 25 year loan on the real estate, but the two loans can’t be put together and blended.
SBA Fee Reductions
Mariani also covers SBA fee reductions through September 2024. While there are no fee reductions for 7 (a) loans over $2 million, there are other very notable changes.
These changes fall into three main areas. For loans with a maturity that exceeds 12 months, up-front fees are now: 0% for loans of $1,000,000 or less, 1.45% of the guaranteed portion of the loan up to and including $1,000,000 as well as 1.70% of the guaranteed portion of the loan over $1,000,000. The third fee reduction is for loans over $2,000,001 or greater, in which 3.50% of the guaranteed portion of the loan up to and including $1,000,000, plus 3.75% of the guaranteed portion of the loan over $1,000,000.
In terms of SBA collateral requirement changes there are several areas of note. For loans over $50,000, it is necessary for the lender to “follow the written collateral policies and procedures that it has established and implemented for its similarly-sized, non-SBA guaranteed commercial loans, except that SBA does not require a Lender to place a lien on non-business assets such as personal homes, even if it is the Lender’s policy to do so.”
Mariani wants business brokers and their clients to realize that they don’t have to allow a lien on an asset such as a home. In the past, he has seen lenders attempt to put a lien on a borrower’s home and goes so far as to call the practice “rampant,” and he explained that this is a common occurrence among lenders.
It is clear that the SBA has made major changes in numerous directions. Business brokers and M&A advisors will be well served to remember the 5 areas Mariani covered during his insightful webinar.