The Small Business Administration (SBA) provides extensive business appraisal guidelines in its most recent SBA SOP 50 10 5 (K), effective as of April 1st, 2019, with regard to business appraisal requirements for SBA-sponsored 7(a) loans. The entire SOP document is over 400 pages long; so, to make things easier for the reader, below we provide the relevant business valuation requirements as detailed in Chapter IV. REAL ESTATE APPRAISAL AND BUSINESS VALUATION REQUIREMENTS:
E. Business Valuation Requirements – Change of Ownership:
1. 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 valuation 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 valuation assists the buyer in making a determination that the seller’s asking price is supported by an independent qualified source.
2. In order for the individual performing the business valuation to identify the scope of work appropriately, the business valuation 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 valuation to know what is included in the sale (including any assumed debt). The business valuation must include the individual’s conclusion 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 valuation prepared for the Applicant or the seller. The cost of the appraisal may be passed on to the Applicant.
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 valuation 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 existing owners or family members), the Lender must obtain an independent business valuation from a qualified source.
iii. A “qualified source” is an individual who regularly receives compensation for business valuations 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;
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) Business Certified Appraiser (BCA) accredited through the International Society of Business Appraisers.
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 valuation 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 being financed is over $250,000 or if there is a close relationship between the buyer and seller (for example, transactions between existing owners or family members) and the business operates from a Special Purpose Property, the Lender must obtain an independent business valuation performed by a Certified General Real Property Appraiser.
iii. The business valuation 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 business valuation 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. If the application will be submitted to the LGPC, the business valuation must be submitted as part of the loan application. (See Chapter 6 of this Subpart.)
d. If the application will be submitted under delegated authority, the business valuation 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 valuation 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 valuation to include a comparison of the loan amount and the business valuation.
e. Any amount(s) of the loan proceeds that will be used to facilitate a change of ownership may not exceed the business valuation.
f. Lender Verification of Business valuation Financial Data: Lender must obtain a copy of the financial information relied upon by the individual who performed the business valuation and verify that information against the seller’s IRS transcripts to ensure the accuracy of the information.
This concludes the SOP excerpt.
The SOP can be retrieved in full at this address: Click to go to SBA site for SOP downloads.
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