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Business valuation for SBA Loans

SBA logoThe SBA’s Standard Operating Procedures (SOP) was recently updated and released.  It is more streamlined and condensed, allowing for easier reference to and understanding of guidelines.

One specific area we want to highlight is the requirement of an independent, third party business valuation for SBA loans exceeding $350,000.  Here is the exert:

(i) Business Valuation

(a) Determining the value of a business is the key component to the analysis of any loan application for a change of ownership. The need for an accurate valuation is true regardless of whether the financing is structured as an asset purchase or a business purchase.

1. For loans less than $350,000, a lender may do its own valuation of the business begin sold to identify whether the seller is requiring a price that is not supported by the business’s historical performance.

2. For loans of $350,000 or more, the lender must obtain an independent business valuation from a qualified source.

As this emphasizes business valuation for a “change in ownership”, in many cases, a business valuation has already been conducted by the seller, assuming they are working with a legitimate intermediary/broker.  Some business brokers will conduct an analysis themselves, while others will assist in the gather and recasting of data, then bringing in a legitimate, third-party valuation firm for modelling, analysis and reporting. 

If an independent business valuation has not been performed, then banks need to seek a qualified source for valuation work.  A great example which validates such ‘Checks & Balances’ can be found in the following audit report conducted by the SBA where a lender provided a valuation, but it was tainted due to biased opinions and the subject company grossly overvalued, leading to a loan default.

We have a call into SBA headquarters for more information and will update everyone should any additional findings be of key relevance.

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Mid-market business valuation indicators strong

Most Americans continue to read, hear and see troubling news about the U.S. economic outlook.  Business owners need some reassurance that the sky is not falling, particularly for business owners considering the future sale of their business.  Today is a seller’s market!  But, cyclical indicators point that this window will not stay open forever.

Business valuation indicators are showing strong multiples for technology and software-related companies as well as those that cater to the baby boomer and senior demographics.  For the fifth consecutive year, Inc and Business Valuation Resources (the authority on valuation data, metrics, and comps) have prepared an interactive study to analyze the valuation of middle market companies (those with annual sales from $10 million $500 million).  Take a moment to visit this resource and see how your company stacks up compared to nearly 4,000 mid-market transactions analyzed over a 3-year window.

A word of caution.  While more than 140 industries are analyzed, you may not find an ideal comp for your business.  There is a big difference between a strategic buyer and a financial buyer.  Small businesses with sales of less than $10 million need to be aware that rule of thumb multiples based on adjusted EBITDA are typically less than middle market.  Per Rob Slee’s excellent book “Midas Managers”, firms considered small business generally see 2-4X adjusted EBITDA while those with sales in from $10MM to $100MM are more likely to see 5-7X.  Using a generic multiple is very dangerous for any business owner and is not recommended.  Determining your company’s market value through the process of an independent business valuation is THE first step and owner should take prior to taking their company to market.  Let’s take a $1MM annual sales, $200K discretionary cash flow business.  Using a simple 2-4X multiple leaves a gaping margin of error of $400,000!!!  Your business is most likely your most valuable asset.  Don’t fall prey to assumptions and being a penny-wise, pound foolish when it comes to business valuation.  Each buyer is different, with different motives for acquisition (financial, strategic, etc).  A business priced too high will not sale.  A business priced too low, well you know what happens then.

Know your value.  Know your business.

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