by Greg Caruso | Sep 29, 2022 | SBA Business Valuation and Appraisal
In 2018 the Main Street Employee Ownership Act (MSEOA) was passed. It was thought the MSEOA would allow companies to get an SBA 7(a) loan for an ESOP transition. Unfortunately, the SBA requirements to secure the 7(a) loan for an ESOP transition made it unlikely that anyone to use it. They are still using a case-by-case approval process for ESOP loans. The NCEO outlines those requirements in a recent blog post.
This June, Congress introduced H.R. 8254. The Appropriations Committee report states:
Employee Ownership.–The Committee recognizes that employee-owned businesses are uniquely structured and provide wide-ranging benefits for businesses, workers, and the local economy. The Committee notes that the Main Street Employee Ownership Act, which Congress enacted in section 862 of Public Law 115-232, requires SBA to make structural changes in SBA lending programs to ease the challenges faced by employee-owned businesses in accessing financing. This legislation also requires SBA to use Small Business Development Centers (SBDCs) to establish an employee-owned business promotion program to provide assistance on structure, business succession, and planning. SBA is directed to fully implement these requirements. The Committee further directs SBA to work with the Departments of Agriculture, Labor, and Commerce to provide education and outreach to businesses, employees and financial institutions about employee-ownership, including cooperatives and employee stock ownership plans; provide technical assistance to assist employees’ efforts to become businesses; and assist in accessing capital sources.
https://www.congress.gov/congressional-report/117th-congress/house-report/393
If this bill gets passed, it may create a great opportunity for businesses to sell to their employees.
by Greg Caruso | Apr 12, 2022 | SBA Business Valuation and Appraisal
The United States Small Business Administration—or SBA—loans are primarily for new businesses to get off the ground.
The amounts you can receive vary by loan program but some range up to $5 million! Funds also may be more accessible to some borrowers who struggle to qualify for other business financing methods.
However, most new business owners say that applying for an SBA loan can feel daunting because of the eligibility requirements and application procedures imposed by individual SBA lenders.
Follow these steps to get an SBA startup loan:
Step 1 –Calculate Your Startup Costs
Before you apply for an SBA startup loan, you need to evaluate the needs of your business. First, consider one-time startup costs and then recurring expenses (which may include everything from renting office space to buying equipment and covering payroll for your first employees).
Step 2 – Check Your Eligibility
The Eligibility requirements vary by SBA loan type and individual lender, there are a few general requirements that a business must meet to qualify for an SBA startup loan.
A Business Must:
- Operate for profit in the U.S. or its territories
- Constitute a small business by SBA Standards
- Demonstrate a need for the loan funds
- Have reasonable invested equity
- Have already accessed alternative financial resources, such as personal assets
- Use the loan proceeds for an acceptable business purpose
- Not have any delinquencies on debt to the U.S. government
Step 3 – Write a Business Plan
Most startups do not have extensive financial records like established businesses, so business owners can improve their approval odds by drafting a comprehensive business plan that demonstrates how the business will make money and on what timeline.
Step 4 – Choose a Loan Type
There are several loan programs to meet a range of borrowing needs, however not all of them are good fits for startup companies.
The Options Include:
- SBA Microloans
- SBA Community Advantage Program
- SBA 7(a) Loans
- SBA 504 Loans
Step 5 – Research and Compare Lenders
Borrowers must apply for an SBA loan through an approved financial institution and meet the individual lender’s application and credit requirements. The SBA provides small business owners the Lender Match Platform, which helps business owners choose the best lender to fit their needs.
Step 6 – Prepare and Submit Your Application
Individual lenders impose different requirements, but there are some materials that are requested by most lenders. In addition to a business plan, prepare the following documents as part of your loan application:
- Copies of business licenses and certificates
- Business overview and history
- Personal and business tax returns for the past two years
- Current and projected financials for one to three years
- Profit and loss statement and balance sheet
- Loan application history
Read The Full Article By Forbes That Covers Each Step In-Depth HERE.
Questions, want to know more, contact Gregory R. Caruso, Harvest Business, LLC, t/a The Art of Business Valuation.
by Greg Caruso | Mar 10, 2022 | SBA Business Valuation and Appraisal
See which franchises have the most SBA 7(a) loans outstanding and their default rates. In addition see which franchises have the highest Small Business Administration Loan default rates.
While a particular business may fail for many reasons one of the benefits of a franchise is name recognition and business systems. A high default rate may indicate that the business systems are not resilient and effective. Make sure you both know the value of the business you are buying (we are business valuators providing SBA business valuations after all) and know how successful other owners are.
Click to see this article now.
by Greg Caruso | Feb 22, 2022 | SBA Business Valuation and Appraisal
A key to buying or selling a business is the ability of the buyer to obtain the money for the business acquisition. Many business purchases or business acquisitions will be financed by a Small Business Administration, SBA 7(a) loan. Here are the major steps to obtain SBA 7(a) financing for purchasing a business and several great resources if you wish to learn more.
- Pull together your financial statement. Here is a link to an SBA Financial Statement Form to use
- Gather 3 years of your personal and if you own a business, business tax returns.
- If married, talk to your spouse. In most cases they will have to co-sign the loan. If they are not willing to do this bring this up early with the bank. It may prevent you from obtaining a loan.
- You may want to get per-qualified from a bank. The banker will look at your information and help you understand the size business that is realistic for you to finance. In all cases the financials of the business will impact and may change this preliminary analysis.
- Obtain any other information requested by the bank loan officer packaging the Small Business Administration loan. There are likely to be many necessary documents.
Next, armed with some idea of the loan you are qualified to get go out and find a business to buy. This is a process. Figure it is likely to take six to nine months and will be a lot of work. Once you identify a business you want negotiate a letter of intent (LOI) with the Seller. A LOI is a preliminary outline of the business terms that your business purchase will be based on. Armed with the LOI go back to your SBA loan officer and….
- Provide the letter of intent to the SBA loan officer
- Provide three years Tax Returns for the Selling Business
- Prepare a forecast and business plan for the next three years for the business finances.
- Complete a full SBA Loan Application
- Obtain all other required documentation. Click here for an SBA 7(a) Loan Program list
Once you have made a full application with the SBA lender for the SBA small business loan there will be many other things for you to do.
- The lender will obtain an SBA Business Appraisal or SBA Business Valuation. This business appraisal confirms that you are paying within the range of Fair Market Value for the business. It means the price you are paying is within the range of a fair deal. It does not mean you are getting a great deal.
- Do your own due diligence. Hire an accountant to go through the books and records and tie cash to the banks and source documents and a check basis. Check out the condition of assets, talk to key people, talk to suppliers, etc. Make sure you are buying what you think you are buying.
- If you have a letter of intent negotiate the full Binding Purchase Agreement. Make sure you hire an attorney that is familiar with business transactions in the state you are in.
- When the day comes, go to closing……Congratulations on your new business and new SBA (7(a) business acquisition loan.
SBA 7(a) and other SBA programs provide a huge source of debt funding to increase your leverage or buying power. For most individuals buying a small business the 7(a) program is the only source of debt funding. The SBA makes loan guarantees to banks for qualifying buyers and businesses that reduces the bank risk to a level where the banks can lend. For details see – SBA, Buy an Existing Business or Franchise https://www.sba.gov/business-guide/plan-your-business/buy-existing-business-or-franchise and How to Finance an Acquisition Using an SBA Loan https://www.entrepreneur.com/article/358292
In some situations there are other forms of financing. For instance some businesses can be purchased with Asset Financing such as loans secured by Accounts Receivable or Real Estate financing. Other, extremely stable businesses like medical and dental practices may be purchased with conventional financing. For multiple possibilities see US Chamber of Commerce, How to finance a business acquisition: https://www.uschamber.com/co/run/business-financing/financing-buying-an-existing-business and CNBC, Secure financing with these 9 types of small business loans https://www.cnbc.com/select/small-business-loan-types/.
The Art of Business Valuation and Harvest Business, LLC have performed 100’s of business valuations for SBA 7(a) purposes and directly for buyers and sellers who want to know the value of the business they are buying or selling. If you have any questions please send us an email today.
by Greg Caruso | Feb 8, 2022 | SBA Business Valuation and Appraisal
Sample SBA 7(a) Business Valuation / SBA Business Appraisal Report is provided below. Our reports are completely compliant, reasonably priced, easy to order and have a quick delivery time.
Business valuations that are compliant with the SBA SOP (Small Business Administration, Statement of Policy) are quite technical. In SBA business valuations it is generally agreed that the “Fair Market Value” standard of value is to be used. Conclusions or Opinions of Value are to be issued. According to the AICPA, a Conclusion or Opinion is issued when ALL work necessary to fully understand the value in the professional judgment of the valuator has been done.
Every valuation is going to be different. One of the primary responsibilities of the valuator is to select proper cash flows and the best methods for a given business. But, the below SBA Business Valuation is a reasonable sample and fully compliant with AICPA, NACVA, USPAP and SBA SOP standards.
For More Information on Harvest / Art SBA Business Valuations Click Here.
by Greg Caruso | Sep 29, 2021 | SBA Business Valuation and Appraisal
By Gregory R. Caruso, JD, CPA, CVA
There are over 30 million small businesses in the US, according to the Small Business Administration (SBA), and upwards of 50,000 small businesses are sold each year. If you are buying a small business, an SBA business valuation can get you the loan you need to buy the business. Here is what buyers and sellers need to know about SBA business valuation.
What is an SBA business valuation?
An SBA business valuation is a formal assessment of a business’s worth done in advance of the sale of a business. Buyers who want SBA loans to finance a business acquisition usually need a business valuation. The SBA guarantees loans from lenders who comply with the SBA program rules. SBA guarantees reduce the risk of loss to the lender encouraging them to lend.
The SBA rules are known as the SBA SOP or Statement of Policy. Any business purchase over $250,000 in value and any business purchase between related parties (family or business type relations) will require a business valuation from a “qualified source.”
Why do I need a SBA business valuation?
As stated in the SOP:
“An accurate business valuation is required because the change in ownership will result in new debt unrelated to business operations and potentially the creation of intangible assets. A business valuation assists the buyer in making a determination that the seller’s asking price is supported by an independent Qualified Source (see definition in Appendix 3).” (SBA SOP p 262)
What are the major points required by the SBA SOP?
The rules outlined by the SBA SOP are specific. Here are the major points for a business valuation required by the SBA SOP:
- It must be requested by and prepared for the lender
- It must identify if the transaction is an asset sale or stock sale.
- It must be specific enough to know what is included in the sale including assumed debt if any
- It must provide the valuators conclusion of value
- Valuators qualifications
- Valuators signature
How does an SBA qualified business valuation work?
First, a valuator with a valuation certification from an acceptable body (ASA, CVA, ABV, are a few of the accepted designations) will prepare a business valuation in compliance with valuation standards. This valuation will determine the value of the asset being purchased, and that it is within the range of a fair market value standard of value. In short, I find that the buyer is paying a reasonable amount of the asset being purchased.
Business valuation is quite complex (as I say, it is an art and a science). But, at its core, we are trying to determine that it is reasonable for the business assets (including people) to keep generating cash flows at a level consistent with the amount a buyer is agreeing to pay.
Because all businesses are unique, we adjust the company financials to be apples to apples comparisons to several different types of models. This is called normalizing the financials.
Business valuation uses comparisons. Market method approaches use actual sale transactions or stock market values to compare. Income approaches look at what an investor would pay. Asset approaches look at what the assets are worth, if sold off on their own. The valuator adjusts the financial information and then selects the base approaches to estimate the value.
Business valuators are not auditors. We are allowed to assume that data being provided is reasonable and true. Therefore, you as a buyer still need to perform due diligence to make sure the data being provided to the business valuator is true. A business valuation does not replace careful due diligence.
What do I need to do to order a business valuation?
In most cases, the lender is going to order the business valuation as this is required by the SBA SOP. (It is certainly appreciated if you ask them to reach out to us.) In most cases, the business valuator is going to need: 3 years tax returns for the company; 3 years internal financial statements; year-to-date financial statements (profit or loss statement and balance sheet); accounts receivable aging; and accounts payable aging; letter of intent or contract of sale. Most valuators have a questionnaire to cover the required management interview and to answer small but important questions. Most businesses will also have one or two other documents specific to their industry. The loan underwriter will also need most of these documents so get them early in order to not slow down your SBA loan underwriting process.
Contact me to find out more about business valuations and buying or selling your small business.
