When a lender is financing the purchase of a division of a business it might be impossible to adequately segment a seller’s financials or accurately determine what impact the sale of a division or segment of the business will have. And when the financing involves an SBA 7(a) loan, it could be difficult to determine what financial information would be sufficient to the SBA and/or whether the sale is in the best interest of the business.

I recently came across a case that I hope will generate some dialogue among yourselves and/or with me. Let’s call it, “The Case of the Weary Wine Retailer.”

The Situation. Nodaway Wines had stores in two Northwest Missouri towns: Stanberry and Clyde. Darnay, the business owner, was getting older, and traveling between the two cities was wearing him out. So he was selling the Clyde location to Lucy, the store’s manager. Together they approached Two Cities Bank and Trust to finance the purchase and were now meeting with Carlton, the local loan officer.

Since Missouri is the “Show Me State,” let’s not talk about it, let’s eavesdrop:

CARLTON. An SBA 7(a) loan might be just what you need, Lucy. We use that product to finance the purchase of a whole business. We also use 7(a) when only a division or a segment of an existing business is being sold, but there are several factors to consider:

First, for a change of ownership, SBA requires verification of the seller’s business tax returns. Darnay, I understand that you have financials including quarterly balance sheets, debt schedules, and income statements for each location. But you file just one return for the whole business.

To Himself. Hmmmm. So how can I verify financials for just the Clyde location? The SOP states that other forms of verification can be used, yet it lists only sales tax payment records as an example. (SOP 50 10 7.1  p.72) Other than that, the SOP is silent.

 To Darney. Let’s get the balance sheets, debt schedules, and income statements for each location. Then I’ll have you sign a form so we can get a transcript of the business taxes from the IRS. I’ll compare the two and determine what is being purchased, and whether that location can service the debt.

I figure you’ve already determined that the sale will be good for the Clyde location. SBA requires that the change of ownership will promote the sound development of the entire business or preserve its existence. (SOP 50 10 7.1 p. 96). In this scenario, it appears that the change of ownership will preserve both locations and promote the development of each. You’ll need to describe that benefit in writing.

But as I’ve said, there are a bunch of factors to consider:

  • Darnay, have you and Lucy agreed whether you are selling the business’ stock or just the assets?
  • Lucy, please remember, we’re dealing with the “Small Business Administration,” ─ emphasis on “business.” So the loan must be made to your new business. You will be either a guarantor or a co-borrower.
  • And when the two of you agree on a purchase price, remember that the amount of the 7(a) loan is capped at the business valuation for the Clyde location only.

As Darnay and Lucy absorbed all this, Carlton considered the challenge he would face in knowing what financial information might be sufficient for SBA and adequately segmenting the seller’s financials, as well as in accurately determining the impact of the sale on the entire business.

For these reasons, he decided to submit the Clyde 7(a) loan application for general processing. If successful, he would obtain SBA’s assurance that the loan met the Agency’s credit criteria.

Good solution? Let me hear from you … email or Contact JRB.

Richard Jefrey, Senior Associate
Head Underwriter