Do I need an SBA valuation?
To many business owners, the Small Business Administration (SBA) 7(a) program plays an integral role in their ability to scale their businesses. This program focuses on offering guaranteed business loans at competitive terms. Since regulations require that the borrower must obtain a business valuation from a qualified source in order to qualify for certain 7(a) loans, it’s important for those borrowers and their advisors to understand when a valuation is required and what is involved in an SBA valuation.
When are valuations required?
In many instances, valuations are required if the 7(a) loan proceeds are to be used to finance an ownership change within the company. An ownership change involves 1) a buyer interested in purchasing a 100 percent interest in a business, or 2) a business interested in purchasing 100 percent of an existing owner’s interest. If there is no intended change in ownership, a valuation isn’t required, but remember that a loan used to refinance a previously financed change in ownership may require a valuation.
In the instances where the transaction includes a change in ownership, the SBA requires a valuation if the amount being financed is more than $250,000, excluding the appraised value of any real estate or equipment being financed. In addition, a valuation is required if the buyer and seller are related (i.e., business partners or family members).
Do I need a valuation professional?
If it is determined that a valuation is required, the appraiser must be independent and qualified to perform the valuation. Due to the independence requirement by the SBA, the appraiser can’t maintain an interest in the transaction’s outcome. This usually limits the deal’s broker or lender from providing an in-house valuation.
The SBA’s Standard Operating Procedures (SOP) define “qualified” as pertaining to an individual who regularly receives compensation for business valuations and has received one of the following credentials: Accredited Senior Appraiser (ASA), Certified Business Appraiser (CBA), Accredited in Business Valuation (ABV), Certified Valuation Analyst (CVA), Accredited Valuation Analyst (AVA) or Accredited Business Certified Appraiser (ABCA).
The SOP also stipulates that:
- The lender must request for the valuation to be prepared. However, a broker may recommend an appraiser.
- The lender must define the scope of work required so that the appraiser understands whether the transaction is an asset purchase or a stock purchase. Additionally, the appraiser should have a clear understanding of the components included as part of the sale.
- The final business appraisal opinion must be that of the appraiser. In addition, the appraiser must include their qualifications and sign the appraisal.
- The appraisal must be conducted in accordance with the most updated Uniform Standards of Professional Appraisal Practice (USPAP) requirements.
- In addition, the lender must obtain a copy of the work papers relied upon by the appraiser and verify the provided information against the seller’s Internal Revenue Service (IRS) transcripts.
Will your valuation stand up to the scrutiny?
To ensure that an appraisal garners the SBA’s approval, it is vital the lender engages a qualified, independent appraiser. It is also imperative that the appraiser is familiar with the intricacies of the SBA lending process. Windham Brannon’s team of valuation professionals is ready to assist you with your valuation needs in preparation for an SBA loan application. For more information, reach out to your advisor, or contact Matt Stelzman.
