The Small Business Administration has just released SOP 50 10 5(J) (link to download full SOP at the bottom). The updates aren't effective until January 2018, but here are some observations.
A major change is the new requirement for an equity injection of at least 10% (of total assets) in a change of ownership transaction. This is a decrease from the previously required 25%. For change of ownership transactions in which a partial owner is buying out a partner's share, the remaining owner must provide an equity injection to bring the total pro-forma equity to at least 10% of total assets. No injection is required if the remaining owner already meets the 10% requirement.
For transactions in which seller financing is used, the SBA has clarified that "Lenders must consider seller debt as debt in all applications (including debt refinance and change of ownership) unless it is on full standby for as long as there is an outstanding SBA guaranty."
There were several changes that effect fee disclosure and clarify which fees are allowed to be charged to borrowers. In the old SOP (still in effect until January 2018), there were specifically named "allowed fees" and guidance on disallowed fees. This language has been replaced and any fees, that are not specifically listed as allowed, are prohibited.
Download SBA's general summary of changes:
Summary of Updates for SOP 50 10 5(J)
Another big change is to the franchise agreement review process. With the old SOP, Lenders were required to review all franchise agreements, addendum agreements, and any other relevant documentation and agreements between the franchisee and the franchiser. The SBA has taken this review in house and lifted some of the burden from Lenders.
The new SBA Franchise Directory contains all franchise and other brands reviewed by the SBA that are eligible for SBA loans under the SBA's affiliation rules and other criteria. From the SOP, "Lenders will be able to rely on the Directory and will no longer need to review franchise or other brand documentation for affiliation or eligibility." The Directory isn't up yet but will be located here https://www.sba.gov/forlenders
Download SBA's summary of changes to franchise review process:
Changes to Franchise Review Process
Download the full SBA SOP 50 10 5(J):
SBA SOP 50 10 5(J)
Lenders, feel free to reach out to me with questions regarding the business valuation requirements for the SBA 7(a) Loan Program.
Brandon Mitchell, CVA
Owner/Certified Valuation Analyst
BLM Valuation Services, LLC
About the author: Brandon Mitchell is a Certified Valuation Analyst and owner of BLM Valuation Services, LLC. BLM specializes in certified independent business valuations for SBA lenders and small business owners.