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Hey Reader,

(5 minute read)

1. Word on the Street.
2. First computer programmer in 1815.
3. Nobody "falls into" their ideal lifestyle.
4. 5 Major SBA Changes Going into Effect June 1st!
5. Pop Quiz:-)

5 Major SBA Changes Going into Effect June 1st!

TL;DR (for the highlight lovers)

• Info from the famous Heather Endresen!
• Credit elsewhere provision.
• Full standby seller notes.
• Sellers co-signing with their buyer?
• Full article below.

Word on the Street!

💬What She Said💬

Ada Lovelace (1815-1852)

• First computer programmer.
• English mathematician.
• Created a program for Charles Babbage’s prototype of a digital computer.
• Early programming language, Ada, was named after her.

📣📣Listen Up!

Let's Buy a Business: How to Design Your Business Around Your Life with Jodie Cook​

• A year to figure out how to systematize her business and implement those changes.
• And exactly how she did it.
• Empower-Train-Trust.
• Spreadsheets still rule!
• The Groundhog Day framework.
• Nobody "falls into" their ideal lifestyle.

5 Major SBA Changes Going into Effect June 1st!

If you’ve been paying any attention to the business buying space, or business selling space for that matter, you’ve probably heard that some big changes are going down in SBA Land. Those changes go into effect next week so here’s a quick refresher from one of the best in the SBA business, Heather Endresen. You can find her LinkedIn profile here.

If you would like to read all 467 pages of the SBA SOP 50 10 8 that details these changes, feel free to do so here. For the speedier and more concise highlights, from Heather and riffed on by me, read on.

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1. Personal Resource Test for Credit Elsewhere

In reality, the SBA has always required a “credit elsewhere” determination. This is a fancy way to say that SBA loans are actually meant for people that cannot get traditional loans elsewhere. In practice, this “requirement” was inconsistently enforced, at best. I had a different SBA lender tell me over a Crown and nachos that he can always come up with a reason why someone would qualify for an SBA loan under this test. Lots of workarounds. Going forward, the Credit Elsewhere Test is going to be more strictly enforced, so they say.

That’s another point: even though the rules are changing, only time will tell how they will be implemented.

• The new SOP (Standard Operating Procedure) lays out more clearly what must be included in the credit memo and what’s considered acceptable evidence that credit isn’t available elsewhere.
• It mandates that SBA lenders document and explain how the borrower does not meet conventional lending standards.
• It also requires lenders to consider available liquidity—even personal assets of owners/spouses—but also defines exceptions.

Bottom line? It may be harder for high net worth people to get an SBA loan.

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2. Seller Note on Full Standby

This isn’t the first time the SBA has changed the rules. And really, this “new rule” is just a reversion back to an “old rule”.

The SBA generally requires a 10% down payment. And they love to see 5% from the buyer and 5% from the seller. Everyone has skin in the game and the buyer and seller both “need” the deal to work. The catch under the new rules require the seller note to be on full standby. In other words, the seller is loaning the buyer part of the required down payment. That loan or note, cannot be repaid to the seller until the SBA loan is paid in full. The SBA loans can be for 10 years or more, so that’s a long wait.

Some experts believe this will make most sellers refuse to help with the down payment. But if you do the math, I disagree. Say you’re selling a $3,000,000 business. The buyer asks you to loan them 5% of that price for part of their down payment, aka equity injection. 5% of $3M is $150,000. Are you, as the seller, going to be that concerned about waiting for $150K when that wait will enable you to put $2,850,000 in your pocket now? I think not!

So, the seller may help with the down payment under the following circumstances:

• It is on full standby for the life of the loan (no payments of principal or interest allowed).
• It represents no more than 50% of the total equity injection

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3. Rollover Equity Requirements -

The old SBA rule stated that as long as you owned less than 20% of the business, you did not have to sign the personal guarantee that is almost always part of the SBA process. This usually played out in two ways.

The first scenario would allow you and I to buy a business together. Since I will only own 19%, I don’t have to be a co-signor on your SBA loan. The second scenario would allow me as the business seller to keep 19% of the company and sell you the remaining 81% (a partial buy-in) without co-signing on your SBA loan. Neither of these can happen under the new standard operating procedures.

To restate this, in partial buy-ins or when any seller retains ownership:

• All new owners, regardless of percentage of ownership, must be co-borrowers.
• Any seller retaining any ownership, even less than 20%, must personally guarantee the full loan for 2 years. The FULL loan, not just the small portion related to the minority of retained ownership.

What seller is going to go for this? Probably none. This is going to be a big problem in the trades and other industries where licensing, and the transfer of that license, is a critical component of the deal.

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4. Stock Deal Requirement for Partial Buy-ins

This scenario probably becomes irrelevant based on the reasoning discussed in number 3, but the new rule is as follows:

• Partial buy-ins (transactions where rollover equity is involved) must be structured as stock purchases, not asset deals.
• Asset purchase structures for partial buy-ins are not allowed.

For a detailed explanation of the differences between an asset sale and a stock sale, read this article.

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5. CPA-Reviewed Financials May Be Used in Place of Tax Returns

• Lenders may accept CPA-prepared or reviewed financial statements in lieu of tax returns when tax returns are unavailable, incomplete, or not reflective of operations.
• This provision applies especially to:
  • Sole proprietorships, which don’t file a separate tax return
  • Divisions carved out from larger companies
  • Recent business formations or segment sales

Things are always changing and our first reaction may be to freak out. That’s natural, but true entrepreneurs know that change = opportunity. If any of these new SBA rules look like they are going to break your deal, take a deep breath. Step back and take a look from a new perspective. Necessity is the mother of invention. Maybe these changes will force you into a better deal than you could have come up with before.

And of course, give Heather a call for all your SBA lending needs.

Love ya!

🧐Pop Quiz🧐

The United Nations estimates that money laundering is what percentage of Global GDP?

(Reply to this email with your answer. First closest answer gets a mention in the next issue:-)

Last Issue's winner: Lacey Darnell!

Tourists spend $132 million every year traveling Route 66.

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Thanks so much for reading... Peace Out!✌🏼

Della Kirkman, CPA
dellak@shift-n-gears.com

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