Tips for Hiring a Business Appraiser for SBA Lending

Business Valuations: A “must have” for small business lenders when there’s a change of ownership in businesses secured by SBA loans. Business valuations consider the total value of business operations, as opposed to just tangible assets such as real estate, equipment and inventory. As such, the SBA regards the business valuation as “the key component to the analysis of any loan application for a change of ownership”. It 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.

In a nutshell, the lender is providing debt on more than just the bricks and mortar, equipment or inventory. For example; a retailer is buying an existing customer base, an insurance agent is buying ongoing policies, a CPA is buying clients, and all are likely buying some form of reputation, brand, process or assembled work force.

SBA requirements for business valuations are covered in SOP-50-10-5(F) (see page 174-175 or link to SBA website here for full document).  If the total amount financed (including any 7(a), 504, seller, or other financing) minus the appraised value of the real estate and/or equipment is $250,000 or less you (the lender) may perform the business valuation internally unless your internal policies have tighter requirements. For loans financed at more than $250,000, you must hire a qualified appraiser.

Key. Critical: Hiring the right business appraiser. Performing a business valuation requires a different skill set than what’s needed for a typical real estate appraisal or even normal accounting services provided by a CPA. The SBA takes a long hard look at goodwill issues because there’s value in the expertise of the people running the business. Also, how much of the business price includes legit intangibles supported by earnings or how much is unrealistic? An experienced business appraiser possesses the skill set and data resources to properly navigate and report these business issues. Here are some of my recommendations when looking for a business appraiser for SBA lending:

Hire an accredited business appraiser: Historically, business brokers and other consultants not accredited in business valuation (e.g. CPAs) often performed business valuations for small business lending, sometimes with inconsistent results. However, this is a  risky approach going forward as the SBA’s SOP now requires the independent business valuation to be performed by a “qualified source” who regularly receives compensation for business valuations. The qualified source is further defined as being accredited in business valuation by one of the following recognized organizations:

  • Accredited Senior Appraiser (ASA) accredited through the American Society of Appraisers;
  • Certified Business Appraiser (CBA) accredited through the Institute of Business Appraisers;
  • Accredited in Business Valuation (ABV) accredited through the American Institute of Certified Public Accountants;
  • Certified Valuation Analyst (CVA) or Accredited Valuation Analyst (AVA) accredited through the National Association of Certified Valuation Analysts.

As a side note, it’s important to note that the SBA in its latest SOP 50 10 5(F) no longer considers regular CPA’s who are not accredited in business valuation to be a “qualified source”.  

Other SBA requirements for business valuations listed in its SOP 50 10 5(F) include:

  • The business valuation must be requested by and prepared for the lender.
  • The scope of work should identify whether the transaction is an asset purchase or stock purchase and be specific enough for the individual performing the business valuation to know what is included in the sale (including any assumed debt).
  • The business valuation must include the individual’s opinion of value, the qualifications of the individual performing the valuation and their signature certifying to the information contained in the valuation.
  • The lender may not use a business valuation prepared for the applicant or the seller (although the cost of the valuation may be passed on to the Small Business Applicant).

Hire a business appraiser experienced in providing business valuations for SBA or other lending purposes. SBA lenders have unique valuation needs in that they 1) operate under hard closing deadlines usually within a few weeks or less, 2) operate with a limited closing cost budget where prospective clients having the ability to “shop around”, 3) already understand the small business’s background and financial position as they have analyzed it sufficiently to offer it debt financing. Operating under these needs, the SBA lender should look for a business appraiser that can operate under short turnaround time while also retaining quality, has competitive fees, and provides a report tailored for a lending client – a report that provides sufficient information to understand the appraisal but without extraneous detail that may be appropriate for other types of common valuation assignments(If you wish, ask for a copy of a sample business appraisal report if you would like to better understand the type of appraisal to expect).  In many cases business appraisers have set up their practices to accommodate larger scope complex business valuation assignments for larger business clients. As such, typical turnaround time is often much longer – e.g. litigation and large fair value assignments can take several weeks or months – and typical fees are high to accommodate the larger scope and higher overhead taken on to serve large clients. The moral of the story is to find a business appraiser that suits your lending needs.

Use a business appraiser that utilizes multiple valuation methods to substantiate a value.As much as I would like to wish otherwise, no single business valuation method is perfect especially when subjectivity is required. Although buyers, sellers, and analysts may have one preferred valuation method, the use of only one method adds risk of inaccuracy in that the results could differ substantially if any single input is off base. In contrast, the use of multiple valuation methods provides the valuator with the ability to reconcile any outliers produced by any single method and potentially uncover any missed facts or errors. For example, I often place a high weight on an income capitalization method that relies on the analysis of adjusted historical and expected earnings and then applies a capitalization rate based on the estimated risk and growth of the business. After performing the income based method, I’ll also perform a market based method by finding transactions of other similar businesses and then calculate valuation multiples such as price to sales and/or earnings. The market multiples may indicate that similar businesses sell for lower multiples (more risk or lower growth) or higher multiples (less risk or higher growth) than the typical private business. For example, restaurants may often sell at lower multiples of earnings (higher risk) than drug stores (lower risk).  The additional information can then be used to make sure my assumptions in all methods are consistent. If one method differs substantially from another, additional analysis may be required to understand the difference.

Going a step further, you (the lender) could perform due diligence in the same way you work with any outside party including reviewing the appraisal and potentially performing your own internal valuation to substantiate the appraisal.

A primary focus of Affirmed Valuation Services is providing business valuations for SBA lending purposes. I hold the Certified Business Appraiser (CBA) accreditation through the Institute of Business Appraisers which is considered a “qualified source” by the SBA. Feel free to contact me with any questions or comments. I hope my firm can assist you in your business valuation needs!