Harvest Business Advisors typically works with business owners ready to sell their businesses, one of the common refrains you’ll hear from our brokers is to build your business to sell your business. With that in mind, we encourage you to consider the Small Business Association’s 2019 Emerging Leaders Initiative program for small business owners in the Philadelphia area and the Pittsburgh area.
For over a decade, the SBA has provided no-cost entrepreneurship education and training for executives of “poised for growth” companies (typically businesses that have been operating for at least three years, with annual revenues of at least $250K). Unlike programs for start-ups or new businesses, this program is geared towards businesses ready to develop a growth strategy.
From the SBA website, the Emerging Leaders Initiative program includes:
- A three-year strategic growth action plan with benchmarks and performance targets to help the participant emerge as self-sustaining businesses that creates jobs and build communities
- Includes 100 + hours of professional specialized training and peer-to-peer counseling delivered over the course of seven months
- Specialized areas of training include:
- Growth Strategies Plans
- Financing and Access to Capital
- Government Contracting
- CEO Mentoring
The training is offered at two Pennsylvania locations in addition to many other locations across the country.
The Emerging Leadership Initiative program provides – at no-cost – the opportunity to grow and strengthen your company. If you qualify, we encourage you to connect with the SBA to discuss the program further. It’s quite an opportunity – especially for Pennsylvania companies that work in government contracting.
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 (email@example.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 firstname.lastname@example.org.
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 email@example.com or 877.838.4966 to discuss selling your business, ordering a business valuation or buying a business.
Most business valuation analysts belong to associations (such as the AICPA for CPA’s, the NACVA for CVA’s, USPAP for ASA’s) that require certain standards be followed in preparing a business valuation. These business valuation standards tend to be quite rigid for a Conclusion or Opinion of value and more flexible for a Calculation of value. Valuators doing work to these standards (which are required by any group the valuator belongs to and can be voluntarily agreed to by anyone who understands the standards) always represent only their findings (the Opinion found or the Calculation estimated). This means they do not represent you or any other party even though you pay them and you may retain them.
Third party obligations when performing a business valuation require the valuation analyst to be impartial. An example is the bank’s interest in having a fair and impartial business valuation if the analyst is preparing a valuation for a prospective loan and those obligations override allegiance to you.
If the valuator has a conflict of interest that must be stated in the report and it will cause the opinion to not be fully compliant.
Finally, if your purpose is for litigation or potential litigation such as divorce or partnership disputes all experts (including valuation experts) must be impartial or they can be disqualified by the court. Court expert witnesses represent the court to allow the court to better understand a matter. Having said this, in many matters experts hired by the opposing sides may find very different values. Usually this is because facts are not agreed to, risks are assessed differently because underlying assumptions are seen differently by the parties, therefore the found value or result can be quite different.
- Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver the highest price in the smoothest sale transaction possible. Harvest 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 firstname.lastname@example.org or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.
Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver the highest price in the smoothest sale transaction possible. Harvest 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 email@example.com or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.
The SBA business valuation and SBA business appraisal community has developed norms about what we believe is expected by the SBA based on the SOP’s and customs for valuing small businesses.
While the SBA 7(a) loan program can provide loans up to $5,000,000 most SBA business valuations are for smaller businesses with revenues in the $500,000 to $2,000,000 range. Different methods are used to value smaller businesses than larger businesses. I will cover some of the more popular valuation approaches used in SBA business valuations and appraisals.
Want to know more? Please click here for the downloadable e-book. “7 Things You Must Know Before You Order a Business Valuation”
Asset Method. The asset method is rarely used as the primary valuation method because it looks to physical assets to by conveyed (generally equipment and maybe inventory in smaller businesses) and does not easily calculate intangible assets such as goodwill. For SBA business valuations the SOP suggests using Tax Basis asset values as opposed to marking the assets up to market value. If a banker wants to use market value of the physical assets they need to obtain an equipment appraisal. Traditionally the SBA required down payment varied with the amount of goodwill so bankers requested that the goodwill be estimated on this basis. That may not be necessary (it may vary by bank policy and underwriter desires) with the new SOP where all loans may qualify for 10% down payment treatment.
Income Methods. Income methods are the most popular and considered the best indicators of value by the valuation community. Yet, due to the small size of most SBA financed businesses for SBA purposes the Income method is not the prefered method. This is because the income method specifies that it is the value “to an investor”. Many smaller businesses have value to an owner/operator but do not generate enough earnings to have value to an investor also.
In both income methods the cash flows explained below are applied against a discount or capitalization rate calculated using a “build-up method” often based on data from Duff and Phelps Navigator.
That said, there are two primary income methods. The Capitalization of Earnings method looks at the past earnings stream and uses it to estimate the cash flows in the likely foreseeable future. It makes the most sense when earnings are fairly stable and expected to remain that way. When the business is large enough this is the preferred method for SBA business valuations.
The second income method is call the Discounted Cash Flow. This method uses a projection and the future cash flows from the projection used to estimate the future cash flow. Projections can be subject to manipulation and are unproven in any case therefore this method is only used with start-ups and turn arounds where projections can be strongly supported and are also approved by the bank receiving the SBA business valuation.
Market Methods. The market methods look at various historic cash flows typically from the last three years and compares them to the information presented in transaction databases and other sources of transaction information like Pratt’s Stats. Other sources of transaction information can be public filings like EDGAR on line or local knowledge if the appraiser knows local brokers. Typically revenues and discretionary earnings are used as the comparison cash flows although there are many other cash flows the can be compared depending on the industry, company size and other factors.
The calculated cash flow is then compared to the cash flows and recorded sales prices from comparable business sales. There is a lot of variance in how transactions are reported. In general it is felt that averages or values based on multiple transactions will produce a better “multiplier” which is applied to the cash flow to calculate the value. Every valuation annalist has a different way of estimating the multiplier to use in any given case but it usually involves comparing the profitability of the business being valued to the range of reported profitability of the comparables.
Due to the size of the companies being valued for SBA business valuations the market method is the most popular method. In business valuation the individual annalist must determine the most appropriate method and it will vary at times but most of the time SBA business valuations are based on the market method.
In summary generally the market method is used for SBA business valuations. Most valuators have also used the asset method using tax book values to estimate goodwill and intangible assets for the bank also.
Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver the highest price in the smoothest sale transaction possible. Harvest 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 firstname.lastname@example.org or 877-838-4966 to discuss selling your business, ordering a business valuation or buying a business.
HVAC, mechanical contractors, and plumbing contractors including mechanical contractors live in a topsy-turvey world of competitive bids with jobs often starting with little notice. This causes many HVAC contractors to question business planning at all. You should prepare a business plan for the following reasons:
- It gives you an opportunity to look at all key people and productivity including profitability by job, by supervisor, by property manager or general contractor etc.
- It allows you to determine strategy in advance for if things are working well or not working at all.
- It gives you a guide to lead from. It also allows you to include your team in the planning process increasing buy-in.
KISS is the key. Keep It Super Simple. Here is how most HVAC business owners can plan for the future:
- Create an introduction page that specifies in writing your Mission (what you do now) and your Vision (what you want to be in the future). Put your past three years key metrics – Revenues, Gross Margins, Overhead, Profits. Perhaps your fully marked up labor rates etc. Your shorthand for running your business.
- On a second page list specific tasks that will be completed in the next 90 days. List who will be responsible and the due date. IMPORTANT – you must review this list at least monthly with your team. Weekly is usually better. Keep updating and adding new 90 day items as ones are complete.
- Add a Work-In-Process schedule for current and future expected jobs. Add an overhead expense schedule and equipment purchase schedule. Have your financial person create a cash flow schedule. Project your most likely outcome. If you get really motivated project a low and a high.
- If possible and helpful review your WIP schedule by profitability by supervisor, tasks, etc. See where you make the best money. Can you do more of that work?
- Review the entire plan monthly. Review the tasks weekly. Update the projections quarterly or sooner if major changes occur. USE this document. You will be amazed by what you see in front of you that used to only be seen once it occured.
This is not a huge document to “selling” the bank or bonding company on you. This is a practical document you can use to stay focused on grow your business.
For more tips click here to download the e-book, “A Contractor’s Guide to Succession Planning”. A salable business is a well run business. See if you are running your business well.
Harvest Business Advisors sells and prepares business valuations of HVAC, mechanical, and plumbing contractors and more nationally from our offices in Virginia, New Jersey, and Maryland.