The Small Business Administration (SBA) maintains a variety of loan programs to help businesses obtain financing on favorable terms. For small businesses interested in acquisitions, the popular 7(a) program offers SBA-guaranteed business acquisition loans with competitive interest rates, extended repayment terms and other benefits.
Under current SBA regulations, these loans require an independent business valuation from a qualified source if: 1) the amount being financed — less the appraised value of real estate and equipment — is more than $250,000, or 2) there’s a “close relationship” between the buyer and seller. (For example, they’re business partners or family members.) The independence requirement means that it’s risky to rely on valuations performed by brokers or other parties with an interest in the transaction’s outcome.
A “qualified source” is someone who regularly receives compensation for business valuations and either: 1) is a licensed CPA who performs the valuation in accordance with the AICPA’s Statement on Standards for Valuation Services, and/or 2) has earned one of several valuation credentials, including Accredited Senior Appraiser (ASA), Certified Business Appraiser (CBA), Accredited in Business Valuation (ABV) or Certified Valuation Analyst (CVA).
Other valuation requirements include the following:
• The valuation must be requested by and prepared for the lender. (It’s permissible for a broker to recommend a valuation expert so long as the broker doesn’t engage the valuator itself.)
• The lender may not use a valuation prepared for the buyer or the seller (although the cost may be passed on to the buyer).
• The valuation engagement’s “scope of work” terms should identify whether the transaction is an asset or stock purchase and be specific enough for the valuator to know what’s included in the sale (including any assumed debt).
• The valuation report must contain the valuator’s opinion of value, qualifications and a “signature certifying to the information contained in the valuation.”
• The lender must obtain a copy of the financial information relied upon by the valuator verifying that information against the seller’s IRS transcripts.
• The valuation report must result in a “conclusion of value” as opposed to a “calculated value” in accordance with applicable standards.
If your clients are involved in acquisitions financed by SBA-guaranteed loans, it’s critical to verify the independence and qualifications of your valuation experts. Also, to expedite the transaction and the SBA approval process, complete the valuation early in the negotiations.