SBA Business Valuation Requirements: Explained

"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."

      -SBA SOP 50 10 7.1

For more than a decade the SBA has required third party business valuations for most SBA 7(a) loans used for acquiring a small business. The SBA SOP outlines lending requires across over 400 pages, in this article we aim to explain the basic requirements related to SBA business valuations.

Q: What loans require a business valuation?

A: Most SBA 7(a) loans funding more than $250K for a small business acquisition will require a third-party business valuation. However, many lenders will still require the borrower to purchase a business valuation for smaller acquisitions.

Q: Who can prepare an SBA business valuation?

A: The business valuation must be prepared by a "qualified source" on behalf of the bank. The bank may not use a business valuation prepared for the seller, business broker, or any other party. The SBA SOP defines a Qualified Source as an appraiser with credentials such as Certified Valuation Analyst (CVA) from the National Association of Certified Valuation Analysts (NACVA). Every Value Buddy report is prepared by a Qualified Source with our valuation experts having nearly a decade of experience in preparing valuations for SBA lenders.

Q: How much does an SBA business valuation cost?

A: The cost of the business valuation will depend on the valuation firm that the SBA lender works with. Value Buddy offer market-leading pricing of $1,800, but most appraisers will charge between $2,500 and $3,000. In some cases the SBA lenders will allow the borrower to select an appraiser from a set list of firms that have been approved by the lender.

Q: What information is needed to prepare an SBA valuation?

A: The appraiser will need to understand the business' financials including historical tax returns, the deal terms via a purchase agreement / letter of intent, and qualitative factors regarding the industry, management team, etc.

Q: What factors should be considered when choosing a business appraiser?

A: Expertise, price, and turn times are typically the most important factors when choosing an appraiser. It is best to have an appraiser with significant experience valuing businesses in a similar industry. The valuation fees should not be exorbitant, and the report should not delay the loan origination process with slow turn times. Value Buddy pairs every business with an expert appraiser who has prepared valuations for businesses in that industry. Our $1,800 pricing and 3 business day turn times make Value Buddy the preferred appraiser of many top SBA lenders.

Q: What happens if the conclusion of value comes in below the purchase price?

A: The SBA-guarantee of the business acquisition cannot exceed the conclusion of value determined by the appraiser. If this happens the buyer and seller may renegotiate, the lender may offer non-SBA bridge financing, or the deal may be declined. It is important for the buyer to exercise caution with proceeding if their purchase price exceeds the fair market value of the business.