How to Order an Small Business Administration (SBA) Business Valuation for Your SBA Loan

When buying a business and financing with SBA, your bank’s SBA business valuation is very important. 

According to the SBA SOP (Small Business Administration Statement of Policy) your bank will be required to obtain a third party business valuation, if you have more than $250,000 of goodwill OR if your business acquisition transaction has related parties.

Related parties can be family members or boss / s;ubordinate relationships.  If the third party valuator does not find the proper value, your loan amount may be reduced or the loan may be rejected.

Whether you are a banker, a borrower, or a seller below is a summary of the ordering process for SBA loans.  Finally, should you have any questions on the process you are always welcome to contact us at Harvest Business Advisors (info@harvestbusiness.com).

Have three years of tax returns for the business. Have current and prior year, (i.e. March 2019 and March 2018) year to date data.  This allows the reviewer to see if the business is doing better or worse from last year taking seasonality into account.

If the Company has reviewed or audited financials provide them also.  In certain circumstances, you may need internal financials for all years, but that will vary case by case.

Have other important documents available such as

  • real estate lease
  • contract of sale or the letter of intent
  • loan commitment
  • the accounts receivable aging
  • the accounts payable aging
  • owner and manager salary and benefit information.  (Owner benefits including health insurance, auto, travel, entertainment, and unusual personal purchases.)
  • payments and benefits to other family members

Most valuators will also have a questionnaire for management or interview management.   If there are many personal benefits, those will have to be supported with additional documentation.  In some cases additional documents may be required based on the business and fact pattern.

Use an experienced valuator. There are a tremendous number of assumptions baked into any business valuation. Proper selection and weighting of those assumptions and choices require experience and will have a tremendous impact on your final value found. Being able to write a clear report and defend the valuation requires even more experience. Experience matters in business valuation. To select a proper valuator know the following:

  • Have they performed SBA business valuations?  (this is important as the SBA has some slightly different requirements from other valuations)
  • Have they performed over 25 business valuations?  (judgment is gained in practice)
  • Are they approved by your bank? (some banks have their “own” lists)
    • Recognize that while an opinion of value is a specific number due to the large quantity of assumptions and adjustments coming into play, valuations can reasonably come in over a range. Most valuators feel that two valuations with values within 10% of each other have pretty much found the same value.
    • Typically the SBA business valuation will take anywhere from one to two weeks from when all documents are provided (not the order date) depending on the size and complexity of the work. Often additional documents will be needed after the first set is reviewed.  Provide those documents as quickly as possible to keep your costs down and speed up the process.
    • Finally, realize that your valuation is likely to cost less if your records are clear and you provide the valuator all of the documents in an organized fashion. The longer it takes to get documents and the more work the valuator has to do just to get the documents in working order, the more your valuation will cost.

To learn more about business valuations, please download our e-book: “7 Things You Must Know Before You Order a Business Valuation” 

About the Author:  Gregory R. Caruso, JD, CPA, CVA, Partner at Harvest Business Advisors. Greg is the Editor In Chief of “Around the Valuation World” for the NACVA. Harvest has performed over one hundred SBA business valuations and hundreds of other business valuations. Greg can be reached at gcaruso@harvestbusiness.com.


 

Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver a high price as part of a smooth exit transaction.

Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@harvestbusiness.com or 877.838.4966 to discuss selling your business, ordering a business valuation or buying a business.