Article by Roger Schlueter, MBA
Sections of this article were taken from the SBA SOP (Standard Operating Procedure)
” A business valuation assists the buyer in making a determination that the sellers asking price is supported by historic operations and permits the buyer to make a reasonable return on his or her investment.” (SBA SOP)
A Business Valuation is a requirement for the financing of Good Will or Intangible Assets in a Change of Ownership when purchasing a business when using the SBA 7a Loan Program for financing. The Bank can do the Valuation if the Good Will and Intangible Assets are valued at no more than $250,000.
An Independent Valuation from a Qualified Source is needed if the amount of the Good Will and Intangible Assets are valued at more than $250,000 or if there is a close relationship between buyer and seller. This would be the situation if they were family members or partners.
A Qualified Source is an individual who regularly receives compensation for Business Valuation and is either: 1) A licensed CPA that performs the business valuation is accordance with the ” Statement on Standards for Valuation Services”, published by the American Institute of Certified Public Accountants (AICPA) or 2) Is Accredited by one of the following recognized organizations:
a) Accredited Senior Appraiser (ASA), Accredited through the American Society of Appraisers.
b) Certified Business Appraiser (CBA) Accredited though the Institute of Business Appraisers.
c) Accredited in Business Valuation (ABV) Accredited though the American Institute of Certified
Public Accountants.
d) Certified Valuation Analyst (CVA) Accredited through the National Association of Certified
Valuation Analysts.
e) Accredited Valuation Analyst (AVA) Accredited though the National Association of Certified
Valuation Analysts.
The Business Valuation must be requested by and Prepared for the Lender. The Valuation must include the ” Opinion of Value”, and the Qualifications of the individual and their signature. This cost may be passed on to the borrower and included in the Loan. The Scope of Work must be included and identify whether the transaction is an Asset Purchase or a Stock Purchase and be specific enough to state what is included in the sale including any assumed debt.
The lender may use a going concern appraisal to meet these requirements if:
1) The loan proceeds will be used to purchase a special use property;
2) The Appraisal is performed by an Appraiser experienced in the particular industry and who is either
a “Qualified Source” as identified above or has successfully conpleted the Appraisal Institute
course “Fundamentals of Separating Real and Personal Property from Intangible Assets”, and
3) The Appraisal allocates separate values to the individual components of the transaction including
land, building, equipment, and intangible assets.
If the application will be submitted to the LGPC (Loan Guarantee Processing Center), the business valuation must be submitted as part of the loan application.
If the application will be submitted under delegated authority, the business valuation may be obtained and reviewed after the issuance of a SBA Loan Number and prior to closing.
Any amount in excess of the business valuation may not be financed with the SBA guaranteed loan.
The lender must obtain a copy of the Financial Information relied upon by the individual who performed the business valuation and verify that information against the seller’s IRS transcripts to ensure the accuracy of the information.
This information was taken, some of which word by word, from the SBA’s SOP and any misinterpretation or misunderstanding is regrettable but not to be held liable by the author. An Attorney should always be consulted in any business purchase transaction.
Please see my website, www.schlueterfinancial.com for any contact information or additional information.