Why a Valuation is Needed for a SBA 7(a) Loan

Several years ago the Small Business Administration (SBA) included provisions in its Standard Operating Procedures (SOP) that required an independent business valuation (appraisal) from a qualified source under certain circumstances for SBA loans, including SBA 7(a) loans.

The Small Business Administration (SBA) has long been a source for small businesses financing needs and has recently played an increasingly important role during challenging economic conditions in assisting entrepreneurs in receiving secured loans to get their company up and running.  These funds have been used for the financing of a business, capital expansion or real estate.

The SBA offers several loan programs including General Small Business Loans (“7(a)” loans), Microloan Program loans, Real Estate & Equipment Loans (CDC 504 loans) and disaster loans.

The 7(a) Loan Program is different from traditional loans offered by lenders and other SBA loan programs because the 7(a) is a multi-purpose business loan (i.e. can fund working capital needs, be used to refinance debt, purchase equipment or inventory or construct leasehold improvements) in which the SBA guarantees a portion of the loan made by a Lender and is often a good fit for those businesses with less established credit histories looking to borrow up to $5,000,000. The Lender initiates the loan to a small business and, if the SBA agrees to guaranty the loan, the Lender funds and services the loan.

Several years ago the Small Business Administration (SBA) included provisions in its Standard Operating Procedures (SOP) that required an independent business valuation (appraisal) from a qualified source under certain circumstances for SBA loans, including SBA 7(a) loans.

When addressing your financing needs, your lender will assist you in determining the best SAB loan program for you to pursue.  Whether or not a business valuation will be required when pursuing the designated SBA loan program, your lender will consider the following points when evaluating the need for a valuation and whether or not the provisions of the SBA SOP apply:

  • Is it a 7(a) guaranteed loan?  If it is not a 7(a) loan, the SOP does not apply.
  • Is it a debt refinancing? If the original debt being refinanced was originally used to finance a change in ownership, a valuation is required.
  • Does the transaction involve a change in ownership (sale of the company)?  If it does not, a valuation is not required.
  • Are the buyer and seller closely related (family members or partners)?  If the buyer and seller are closely related a valuation is required.
  • What is the total amount being financed as computed by totaling all financing from all sources and subtracting the appraised value of real estate and/or equipment being financed from the total amount being financed from real estate?  If the result is greater than $250,000 a valuation is required.

The primary purpose of a business valuation for a SBA loan is to independently determine if the acquisition price of a business is reasonable.  SBA valuations are different because they must focus on:

  • The historical performance of a business with its current owner(s) NOT the buyer's projections.
  • They must meet the requirements of SBA's current Standard Operating Procedures (SOP), so the valuation expert must be familiar with the SOP.
  • The valuation expert must be engaged and paid directly by the lender to ensure independence.
  • SBA valuations generally involve the sale of the assets of a business in a change of ownership, so the valuation must be performed under those assumptions.

Small, owner-operated businesses are different than larger companies. Obviously, they are smaller (revenue, assets, employees, locations, territories, etc.) and they operate according to a unique agenda set by their owner(s). Although general valuation concepts and theories still apply, the data and methods used in a valuation of such businesses must be relevant and adapted to accurately value a small business.  Unfortunately, many valuation firms apply the same data and methods they use for larger companies in an effort to reduce costs or time.

Once it is determined a valuation is needed, what makes it independent and who is a qualified source?

  1. To be independent the appraiser/valuation expert must be engaged and paid directly by the lender.
  2. The report must be prepared for the lender.
  3. The cost of the valuation may be passed on to the buyer.
  4. The appraisal report must include the appraiser’s/valuation expert’s:
    1. Opinion of value.
    2. Qualifications and signature certifying the information contained in the report.
    3. A qualified source of valuations is defined as either:   
      1. A licensed Certified Public Accountant (CPA) that performs the valuation in accordance with the Statement on Standards for Valuation Services (SSVS) published by the American Institute of CPA’s (AICPA); or
      2. An individual holding one of the following designations:
        1. i.    Accredited Senior Appraiser (ASA) from the American Society of Appraisers
        2. ii.    Certified Business Appraiser (CBA) from the Institute of Business Appraisers
        3. iii.    Certified or Accredited Valuation Analyst (CVA or AVA) from the National Association of CVA’s.

When contemplating financing needs and in advance of discussion with financing institutions,  reviewing the above and following the guidelines, you can be determine whether or not a valuation will be required for a particular SBA loan.

If one is needed, follow the guidelines above to ensure obtaining the independent valuation from a qualified source such as The VanderBloemen Group and feel free to contact us with any questions you may have.