Understanding SBA Business Valuations
When it comes to Small Business Administration (SBA) valuations, there are many questions that a company will likely ask and be asked. It is important to understand what is involved before looking for the correct provider.
When is a Business Valuation required for SBA financing purposes?
The U.S. SBA provides guidance in its Standard Operating Procedure (SOP) regarding the requirements for using SBA 7(a) loan proceeds to finance the acquisition of a business. In SBA SOP, it states an independent business valuation from a qualified source must be obtained under the following circumstances:
- If the amount being financed (including any 7(a), 504, seller, or other financings) minus the appraised value of real estate and/or equipment is greater than $250,000;
- If there is a close relationship between the buyer and seller (for example, transactions between existing owners, employer/employee, or family members); or
- If the Lender’s internal policies and procedures specify the requirement of an independent business valuation from a qualified source.
The only instance where an independent business valuation from a qualified source is not required under SOP is if the amount being financed (including any 7(a), 504, seller, or other financings) minus the appraised value of real estate and/or equipment being financed is $250,000 or less.
What are the requirements of a SBA Business Valuation report?
If a business valuation is required in conjunction with SBA financing, the SOP states the following requirements must be met:
- The report is certified and signed by an appraiser who possesses one of the following valuation credentials:
- Accredited Senior Appraiser (ASA)
- Certified Business Appraiser (CBA)
- Accredited in Business Valuation (ABV)
- Certified Valuation Analyst (CVA)
- Business Certified Appraiser (BCA)
- The business valuation must allocate separate values to the individual components of the transaction including land, building, equipment, and intangible assets
- Each business valuation must be undertaken with specific instruction for the Certified General Real Property Appraiser to conduct the appraisal in compliance with USPAP guidelines (for transactions involving Real Property)
- The business valuation must be requested and engaged by the lender
- The business valuation must be prepared and addressed to the lender
- The business valuation must implicitly state whether the proposed transaction is an asset or stock purchase.
What is the typical turnaround time for an SBA business valuation?
In working with lenders, we understand the importance of turnaround time to facilitate the loan application. Our turnaround time for business valuations is 3-7 business days given all requested information has been received.
What is the typical fee for a business valuation?
We understand the competitive nature of business valuations for SBA financing and the service providers in the space. We are proud to offer fees that are competitive within the marketplace.
What information is required to provide a fee quote for the business valuation?
To provide a fee quote we only require:
- The purchase agreement, term sheet, or letter of intent (essentially any document which provides the details of the transaction)
- The seller’s last fiscal year tax return
Market Approach for SBA Business Valuations
What information and data are typically requested to complete the business valuation?
The information and data we request from the lender, proposed acquirer, and proposed seller have been refined to only include the information necessary to complete the SBA business valuation engagement. We work with our lenders to ensure duplicate requests of information already collected do not occur. Our typical request list is as follows:
Once engaged we request the following documents:
- 3 years of tax returns
- Interim financial statements (if available)
- Any underwriting documents which discuss the business being sold (if available)
- Any document discussing the proposed loan terms
We also like to understand the following, if available or not included in an underwriting document:
- Owner’s Compensation (any owner on the 1125-E tax form)
- Job title
- Job responsibilities
- Hours worked per week
- Will the proposed acquirer be actively involved in the business?
- Number of employees
- Company history and background
- Any discretionary expenses included in the tax returns
- Any expenses which will be eliminated post-closing
- The condition of the fixed assets to be acquired
- Will there be any major capital expenditure requirements post-closing?
- Any reasons for revenue, gross profit, or EBITDA fluctuations (this is typically after we see the tax returns)
- Identify if there is any seasonality to the business
- Identify if there have been any transactions involving the company in the past three years
- Identify if there is any pending or impending litigation which would materially harm the business
Withum’s Corporate Value Consulting team provides SBA business valuation reports in conjunction with the SBA 7(a) program. Our experienced team oversees the analysis and correspondence between all parties throughout the SBA valuation process. Withum has the resources of a large firm but provides the turnaround time and value of your local provider. To speak with a Withum CVC team member about your SBA 7(a) valuation, fill in the form below or contact Matt Barrett.
SBA Valuation Services