Small business owners attempting to sell their businesses, along with business brokers are frustrated over the rules of the SBA concerning good will, which has stopped a lot of business deals from being completed because of the inability to get the financing to close the deals.

Starting in March the SBA capped the top loan amount for good will at $250,000, which has been the main detriment in owners being able to sell their small businesses, and prospective buyers to acquire them.

For those who may not know, good will refers to the intangible assets of a business, which could include things like its reputation, patents, trademarks, and other non-physical items that make a business what it is, aside from the usual things like buildings and equipment, among other tangible items we think of in relationship to a business.

In other words, looking at the numbers alone aren’t the only factors involved in determining the price of a business, and after adding up the physical items owned by a business, you then have the price the business owner is asking for. The difference between the two is what is called ‘good will.’

Many times in relationship to SBA loans, they view good will as what they call “blue sky,” which means the valuing of good will isn’t realistic, and in most cases they don’t consider it something that can be valued, which is causing the slowdown in selling of small businesses at this time.

One thing the SBA has done in response to complaints was to raise the good will figure to $500,000. If that isn’t enough, the buyers are required to put at least 25 percent of the loan asked for down. It doesn’t matter if the seller or buyer is the one putting up the money, but that’s the deal at this time, as far as requirements go.

The bottom line for determining the price of good will in a business is how it has an impact on cash flow. If intangibles are a big part of that, then the price of good will rises. That’s the pull happening between business owners, brokers, and the SBA.

Of course you probably already see the problem as it relates to service businesses, home businesses and Internet businesses, which would be dealt poor assessments of their value because of the lack of physical assets to apply a value to.

I understand both sides of this issue, but the biggest frustration by business owners and brokers seems to be the idea that good will is being called blue sky. If the SBA wants to have physical collateral for the loan, then they should say so right up front, according to those trying to make deals, rather than generally characterizing good will as unrealistic assessments made by the owners of the businesses and/or their brokers.

While I do agree some good will is much higher in value than the owners and brokers determine, that’s not the case in the majority of deals, and so rather than generalizing, the SBA should take it on a case by case basis to determine whether good will fits the business and its cash flow.

In the end, whether it’s tangible or intangible assets, the cash flow will still have to pay for it to make the deal work. That, more than anything, should be the determining factor in funding the selling of small businesses.

So if you’re looking at selling your business with the buyer needing a SBA loan to make it happen, you really want to get your good will in order so it gives a strong case as to why it justifies the price you’re asking. And be sure at those prices that your historical cash flow will easily pay for your asking price. If it can’t, then you are overpricing the business.