The Small Business Administration (SBA) requires a business valuation whenever there is an SBA guaranteed loan related to financing a change in ownership. This might be the purchase of an entire business or simply the redemption of an ownership interest of a partial owner by another owner of the business.
The SBA states in its valuation requirements that “determining the value of a business is the key component to the analysis of any loan application for a change of ownership. An accurate business valuation is required because the change in ownership will result in new debt unrelated to business operations and create an intangible asset. A business valuation assists the buyer in making a determination that the seller’s asking price is supported by historic operations and permits the buyer to make a reasonable return on his or her investment.”
The valuation requirements revolve around the amount of goodwill and other intangible assets that are being financed. If the amount being financed (minus the appraised value of real estate and equipment) is less than $250,000 (the goodwill), the lender may perform its own valuation of the business. If the amount of goodwill to be financed (loan amount less real estate and equipment) is greater than $250,000 or if there is a close relationship between the buyer and seller (such as family members or business partners), the lender must obtain a business valuation from a qualified business appraiser.
Who is a qualified business appraiser? A qualified business appraiser is a person who is experienced in business valuation and regularly receives compensation for these services. The appraiser must also be a Certified Public Accountant or any of the following: Accredited Senior Appraiser (ASA), Certified Business Appraiser (CBA), Accredited in Business Valuation (ABV), Certified Valuation Analyst (CVA), Accredited Valuation Analyst (AVA). The organizations that issue these accreditations all have standards that the appraisers must follow. Typically these are the Uniform Standards of Professional Appraisal Practice (USPAP) or Statements on Standards for Valuation Services issued by the American Institute of Certified Public Accountants.
The written valuation report must include the appraiser’s opinion of value, the qualifications of the appraiser and signature certifying to the information contained in the report. Typically the report will state the value of the entire enterprise and then itemize the different components of the enterprise such as working capital, equipment, inventory, accounts receivable, real estate and intangible assets (goodwill).
Many times we look at loan application requirements as simply “paperwork” to document a file. But a professionally prepared business valuation helps to determine that the price asked by the seller is fair and that the buyer can achieve the desired return on investment. A business valuation can be a valuable tool to management as a benchmark for operations.
If you are considering a change of ownership or acquiring a business, we can assist in interpreting requirements (such as for the SBA) as well as support your valuation needs. Click here to schedule a FREE 30 minute consultation.