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The Value of SBA Business Valuation Rules

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The Value of SBA Business Valuation Rules By Neal Patel Principal Reliant Business Valuation The Value of Valuation Rules In the latest SBA standard operating procedure, knowing how to determine business value is key he U.S. Small Business Admin- is less than 25 percent, then SBA lend- valuation companies that understand SBA istration’s (SBA’s) 7(a) lending ers cannot process the loan application loans, closing delays may occur. To avoid Tprogram processed more than internally. Instead, the loan must be sub- such delays, brokers can assist lenders 16,000 loans this past first quarter, which mitted to the SBA’s 7(a) loan-processing when it comes to hiring a qualified busi- was more than double the number it center in California, which could cause a ness-valuation company, as well as help backed in the first quarter of 2009. This delay in approval and require additional lenders gather the required documents for increase in SBA loan volume was par- documentation. the business valuation. tially spurred by the American Recovery This past September, the SBA released Before engaging a business-valuation and Reinvestment Act, which contained an updated SOP — 50 10 5(C) — which took company, the qualifications of the person temporary provisions that removed the effect on Oct. 1. The real estate appraisal actually compiling the report should be guarantee fee and increased the govern- requirements remained unchanged: “SBA reviewed. The SOP states: “A ‘qualified ment-guaranteed percentage of SBA 7(a) requires a real estate appraisal if the SBA- source’ is an individual who regularly re- loans from 75 percent to 90 percent. guaranteed loan is greater than $250,000 ceives compensation for business valu- Many of these loans are for business [and] is collateralized by commercial ations” and is either a certified business acquisitions that include considerable real property.” appraiser, accredited senior appraiser, amounts of “goodwill.” The SBA defines Many of the business-valuation require- certified valuation analyst, accredited valu- goodwill as “an intangible asset of a busi- ments also remained the same, mainly: “If ation analyst, accredited in business valua- ness that relates to a favorable relationship the amount being financed minus the ap- tion or a certified public accountant (CPA). with customers, and excess earning power.” praised value of real estate and/or equipment If engaging a CPA, it is recommended As small-business lending continues to is greater than $250,000 or if there is a close that this person also is accredited in busi- grow, commercial mortgage brokers should relationship between the buyer and seller (for ness valuation or a certified valuation familiarize themselves with the new guide- example, transactions between family mem- analyst. This ensures that the CPA has lines for goodwill financing and for busi- bers or business partners), the lender must business-valuation training. ness valuations. obtain an independent business valuation Additionally, the SOP reads: “The busi- from a qualified source.” ness valuation must include the individu- Know the SBA’s SOP The definition of a qualified source is im- al’s opinion of value, the qualifications of Early in 2009, the SBA instituted a good- portant for brokers and lenders to under- the individual performing the valuation and will cap of $250,000, but revoked it later stand. Additionally, brokers and lenders their signature certifying to the information that year. In September 2009, the SBA must follow business-valuation guidelines contained in the valuation.” released standard operating procedure closely. continued >> (SOP) 50-10 5(B), which states: “If the pur- chase price of the business includes intan- Find a qualified source gible assets (including, but not limited to, Many lenders have never previously or- Neal Patel is a certified business appraiser goodwill, client/customer lists, patents, dered a business valuation, as most were (CBA) and principal at Reliant Business Valua- copyrights, trademarks and agreements simply conducting in-house valuations as tion in Cranbury, N.J. Reliant Business Valuation not to compete) in excess of $500,000, part of their underwriting. The recent third- specializes in certified third-party business the borrower and/or seller must provide party business-valuation requirement, valuations for U.S. Small Business Administra- an equity injection of at least 25 [percent] however, combined with the increase in tion lenders around the nation. He is an active member of the Institute of Business Appraisers of the purchase price of the business.” government stimulus programs, brought and the National Association of Government The seller equity (i.e., take-back fi - about an immediate need for business val- Guaranteed Lenders. Reach Patel at (908) 248- nancing) must be on full standby for at uations for many loan applications. 4658 or [email protected]. Connect with least two years. If the combined equity When lenders cannot find qualified him at linkedin.com/in/nealpatelcba. Reprinted from Scotsman Guide Commercial Edition and scotsmanguide.com, November 2010 All rights reserved. Third-party reproduction for redistribution is prohibited without contractual consent from Scotsman Guide Media. << continued Simply stated, the valuation cannot preparing these two items in parallel will several different options, and some might be compiled by an unqualified appraiser increase efficiency. Brokers are allowed not disclose that the “limited” appraisals and then simply signed off by a “quali- to assist borrowers and sellers with the or “calculation of value” reports are not fied source.” To ensure this requirement business-valuation questionnaire, so suitable for SBA-related valuations. is met, brokers and lenders should review they should familiarize themselves with The report has to provide a conclusion of the qualifications of the person compiling the form. value and should conform to the Uniform and signing the report before engaging In addition to the business question- Standards of Professional Appraisal Prac- the company. naire, all valuations require three years of tice. Additionally, the report should include Remember that the business valuation tax returns, interim profit-and-loss state- economic reports and industry reports and must be requested by and prepared for the ments within 90 days of closing, and a should specify how these two factors af- lender. The lender is considered the ap- copy of the purchase agreement. Having fect the business being appraised. praiser’s client; brokers may suggest what these documents ready will streamline the Experienced appraisers also will include valuation company to use, but they cannot valuation process. financial-ratio analysis and describe the engage the company themselves. Provid- The new SOP also now requires that the business and the terms of the contract ing the lender with a few qualified compa- “lender must obtain a copy of the financial thoroughly. More important, the report will nies to choose from, however, will save the information relied upon by the individual include all three valuation methods: the borrower time and money, and the lender who performed the business valuation and income approach, the market approach will likely appreciate the recommendations. verify that information against the seller’s and the asset-based approach. The re- Don’t wait until a lender issues a com- [Internal Revenue Service] transcripts to port should be called a “complete” or mitment letter to search for a business- ensure the accuracy of the information.” “summary” report. valuation company. Experienced lenders To make sure they conform to this rule, the Complete appraisal reports compiled and brokers are now contacting valuation broker and borrower can send all documents for SBA lenders typically cost between companies as soon as they issue a letter directly to the lender, and after reviewing, $2,300 and $3,500 and should be 70 to of intent. the lender can forward the documents to 90 pages long. The cost of the report can the appraiser. The lender should be copied be passed down to the borrower, as per Prepare for the valuation on all correspondence in the event that you SOP guidelines. Although most lenders will wait until the send a document directly to the appraiser. • • • borrower signs the commitment letter to This will ensure that the lender knows about engage the valuation company, request- all documents that the appraiser is using to Brokers should take time to understand ing and completing the business-valua- compile the valuation report. the basic requirements of the SBA’s up- tion questionnaire ahead of time will save dated SOP. With a thorough understand- days, even weeks. Valuation reports ing, you likely will find you can screen and Essentially the same information re- The type of report lenders choose is impor- structure SBA deals more efficiently. • quired to complete the loan application tant, as it will determine the price and the is required for the business valuation, so quality of the report. Many companies have Reprinted from Scotsman Guide Commercial Edition and scotsmanguide.com, November 2010 All rights reserved. Third-party reproduction for redistribution is prohibited without contractual consent from Scotsman Guide Media..
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