Can an SBA loan finance goodwill in a business purchase?
Short answer
Yes. A 7(a) change of ownership loan can finance goodwill and other intangibles if Appendix 15 due diligence is met. A 504 loan cannot. Financing for intangibles has a maximum term of 10 years. Source: SOP 50 10 8.1, App. 15, Para. A; App. 17, Para. A.1.
Yes, on a 7(a) loan. SOP 50 10 8.1, Appendix 15, Para. A, allows a change of ownership loan to finance intangible assets. The list includes goodwill, client and customer lists, patents, copyrights, trademarks, intellectual property and agreements not to compete. The deal must meet the financial due diligence rules in Para. C.1.
Why the valuation matters
Appendix 15 says an accurate valuation is required because a sale results in new debt unrelated to operations and creates intangible assets. If the price exceeds the valuation, the difference must be made up by equity (Para. C.1.a).
Term and collateral
Financing for intangibles, including goodwill, cannot exceed 10 years (Appendix 17, Para. A.1).
Goodwill is not a fixed asset under SBA's fully secured test, which counts real estate, machinery and equipment (Appendix 15, Para. C.3.d). A goodwill-heavy deal can therefore leave a collateralProperty a lender can take and sell if a loan is not repaid. shortfall. That triggers SBA's rules on personal real estate.
Where goodwill cannot go
- A 504 loan and its Third Party Loan cannot finance goodwill or receivables (Section C, Ch. 1, Para. C.13).
- An Eligible Passive Company alone cannot buy intangible assets of a business. With the operating company as co-borrower, a 7(a) loan can fund intangibles for its use (Section A, Ch. 2, Para. A).
Sources
- SOP 50 10 8.1, App. 15, Para. A, Intangible Assets (about p. 363)
- SOP 50 10 8.1, App. 15, Para. C.1.a (p. 371)
- SOP 50 10 8.1, App. 17, Para. A.1 (p. 390)
- SOP 50 10 8.1, App. 15, Para. C.3.d (about p. 383)
- SOP 50 10 8.1, Sec. C, Ch. 1, Para. C.13 (about p. 239)
- SOP 50 10 8.1, Sec. A, Ch. 2, Para. A (p. 41)
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