There are many different factors to consider when a business needs to apply for an SBA loan; the Small Business Administration lays out all of its requirements in its current Standard Operating Procedures (SOP 50 10 6). The document explains the specific requirements that are necessary when a business wishes to qualify for a loan. Additionally, when the SBA loan includes a contemplated change of ownership, the SOP also explains in detail the many things that must be performed and presented, including when a business valuation is required for an SBA loan and the rules related to that business valuation. The following are the relevant excerpts from the SOP 50 10 6 document related to business valuation. Part 2, Section B, Chapter 3, fraction V :
v. Business Valuation Requirements – Change of Ownership:
a) 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 (see definition in Appendix 3).
b) 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 business valuation and their signature certifying to the information contained in the business valuation. The Lender may not use a business valuation prepared for the Applicant or the seller. The cost of the business valuation may be passed on to the Applicant.
i) Non-Special Purpose Properties:
(a) 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.
(b) 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.
ii) Special Purpose Properties: A “Special Purpose Property” is a limitedmarket 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.
(a) 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.
(b) 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.
(c) The business valuation must allocate separate values to the individual components of the transaction including land, building, equipment, and intangible assets.
(d) 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.
(e) 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.
iii) If the application will be submitted to the LGPC, the business valuation must be submitted as part of the loan application.
iv) If the application will be submitted under PLP 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 PLP 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.
v) Any amount(s) of the loan proceeds that will be used to facilitate a change of ownership may not exceed the business valuation.
vi) 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 excerpts.
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