Business valuation for SBA Loans
The 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.