When is a business valuation required for an SBA loan?

When a borrower is seeking an SBA loan to fund a business acquisition, meaning there is a change of ownership, an independent business appraisal may be required.  The conditions that trigger an independent appraisal are outlined in the current version of the SBA’s Standard Operating Procedures, SOP 50 10 5(H), in effect since May of 2015.

The SBA’s business appraisal requirements are clearly defined in the SOP excerpt that follows.  But it is worth noting a few relevant and important observations first:

  • The business appraisal must be requested by and prepared for the lender. An appraisal prepared for the borrower or seller may not be used.
  • This version of the SOP specifies that the business appraisal will assist the buyer; it provides an independent voice from a qualified source as to whether or not the business sale price is reasonable and supportable based on the company’s ability to generate earnings.
  • The business appraisers at Pinnacle Valuations are considered “qualified sources”; they have the SBA’s requisite experience and credentials to perform business appraisals for the SBA.
  • If amount of the loan, net of real estate and equipment values, is more than $250,000 or the transaction is not considered “arm’s length,” a business appraisal is required.

The following excerpt is taken directly from SOP 50 10 5(H), pages 171 – 173.  This section provides the SOP’s primary discussion and guidance regarding business appraisals:

5: Business Appraisal Requirements – Change of Ownership

Determining the value of a business (not including real estate which is separately valued through a real estate appraisal) is the key component to the analysis of any loan application for a change of ownership. An accurate business appraisal is required because the change in ownership will result in new debt unrelated to business operations and potentially the creation of intangible assets. A business appraisal assists the buyer in making a determination that the seller’s asking price is supported by an independent qualified source.

a) Non-Special Purpose Properties

i. If the amount being financed (including any 7(a), 504, seller, or other financing) minus the appraised value of real estate and/or equipment being financed is $250,000 or less, the lender may perform its own valuation of the business being sold, unless the lender’s internal policies and procedures require an independent business appraisal from a qualified source.

ii. If the amount being financed (including any 7(a), 504, seller, or other financing) minus the appraised value of real estate and/or equipment is greater than $250,000 or if there is a close relationship between the buyer and seller (for example, transactions between family members or business partners), the lender must obtain an independent business appraisal from a qualified source.

iii. A “qualified source” is an individual who regularly receives compensation for business appraisals and is accredited by one of the following recognized organizations:

(a) Accredited Senior Appraiser (ASA) accredited through the American Society of Appraisers;

(b) Certified Business Appraiser (CBA) accredited through the Institute of Business Appraisers; [your author is a CBA]

(c) Accredited in Business Valuation (ABV) accredited through the American Institute of Certified Public Accountants;

(d) Certified Valuation Analyst (CVA) accredited through the National Association of Certified Valuation Analysts; and

(e) Accredited Valuation Analyst (AVA) accredited through the National Association of Certified Valuation Analysts.

(f) Accredited Business Certified Appraiser (ABCA) accredited through the International Society of Business Analysts.

b) Special Purpose Properties (A “Special Purpose Property” is a limited market property with a unique physical design, special construction materials, or a layout that restricts its utility to the specific use for which it was built.)

i. If the amount being financed (including any 7(a), 504, seller, or other financing) minus the appraised value of real estate and/or equipment being financed is $250,000 or less, the lender may perform its own valuation of the business being sold, unless the lender’s internal policies and procedures require an independent business appraisal from a qualified source.

ii. When the loan financing any portion of the acquisition of a business is over $250,000 or if there is a close relationship between the buyer and seller (for example, transactions between family members or business partners) and the business operates from a Special Purpose Property, the lender must obtain an independent appraisal performed by a Certified General Real Property Appraiser.

iii. The appraisal must allocate separate values to the individual components of the transaction including land, building, equipment and intangible assets.

iv. The Certified General Real Property Appraiser must have completed no less than four going concern appraisals of equivalent special use property as the property being appraised, within the last 36 months, as identified in the qualifications portion of the Appraisal Report.

v. Each appraisal assignment under this section must be undertaken with a specific instruction for the Certified General Real Property Appraiser to conduct the appraisal in compliance with current USPAP guidelines.

c) In order for the individual performing the business appraisal to identify the scope of work appropriately, the business appraisal must be requested by and prepared for the lender. The scope of work should identify whether the transaction is an asset purchase or stock purchase and be specific enough for the individual performing the business appraisal to know what is included in the sale (including any assumed debt). The business appraisal must include the individual’s opinion of value, the qualifications of the individual performing the appraisal and their signature certifying to the information contained in the appraisal. The lender may not use a business appraisal prepared for the applicant or the seller. The cost of the appraisal may be passed on to the Small Business Applicant.

d) If the application will be submitted to the LGPC, the business appraisal must be submitted as part of the loan application. (See Chapter 6, of this Subpart.)

e) If the application will be submitted under delegated authority, the business appraisal may be obtained and reviewed after the issuance of an SBA loan number and prior to closing. If the lender is processing the application under delegated authority and requests the business appraisal after issuance of an SBA loan number, the credit memorandum must include an estimate of the value of the business. The credit memorandum must be updated after receipt of the business appraisal to include a comparison of the loan amount and the business appraisal.

f) Any amount in excess of the business appraisal may not be financed with the SBA guaranteed loan.

g) Lender Verification of Business Appraisal Financial Data

Lender must obtain a copy of the financial information relied upon by the individual who performed the business appraisal and verify that information against the seller’s IRS transcripts to ensure the accuracy of the information.

This concludes the SOP excerpt.

For a complete copy of the SBA’s SOP, click here:

 

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