When a bank is obtaining a SBA loan to finance the purchase of a business a business valuation is required.  If there is less than $250,000 of goodwill the bank often can perform the valuation internally.  If more than $250,000 of goodwill value then an independent valuator needs to be retained by the bank.  This business valuation expert needs to have proper business valuation credentials like a CVA (Certified Valuation Analyst).  SBA business loans for the sale of businesses tend to be cash flow loans.  Namely the cash flow from the business must support the purchase price.  The bank underwriter checks for that.  The valuation expert is asked to determine that the purchase price of the business is not more than the “fair market value” of the business using accepted valuation principals.

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The valuator is charged with reviewing the overall business situation, starting with the overall economy, industry, and then to work down to the financials in order to ensure that the price and value align.  Typically the business valuator will need the following documents:  3 years tax returns, year to date financial information, the lease or real estate purchase agreement, major client information, accounts receivable and accounts payable information, ownership information, and a copy of the sales agreement.  Specific situations will require more information.  It is also helpful to provide documentation on all “add backs” necessary to normalize owners income.  Often the seller will be interviewed or a questions sheet will be provided to him asking important questions.  It is important to provide documentation as soon as possible in order to allow the valuation to proceed.  Generally valuations take about two weeks from the time all documentation is received.  Clearly they can be done much quicker when necessary.

If your documentation is in good order and your tax return or reviewed cash flows support your price getting a business valuation is a fairly simple part of the SBA loan process.  If you have any questions you may always give us a call.

Gregory Caruso
Harvest Business Advisors
National Business Valuations, Business Brokers
Maryland, New Jersey