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.
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.
Here at Art of Business Valuation, Harvest Business, LCC, we evaluate businesses for a variety of reasons, including Small Business Administration (SBA) loans and Estate and Gift Tax planning. Here is a brief summary of a three recent business valuations by the business valuation firm done by Gregory Caruso, JD, CPA, CVA, lead appraiser.
Estate and Gift Tax: Home Nursing / Eldercare Business Valuation
The business is a franchise of home nursing and eldercare company with several locations. The company had good relations with several hospital systems, which make constant referrals, driving new customers to the business. On the personnel front, the two owners and three strong upper middle managers made a good management team. They ensure consistent timely staffing and care. At this time they needed an evaluation because one owner wanted to gift his part of the business to his children. The buy-sell agreement was being modified and new restrictions were evaluated for estimating the discount of lack of marketability (DLOM) and the minority interest discount calculations. The business valuation cash flow did have some issues around reasonably supporting owner cash flow add backs and these were favorably resolved.
SBA Business Valuation: Equipment Rental Company
The company primarily rents construction equipment, tent rental, and party and catering rental items. In general, these companies tend to be seasonal where summer presents stronger business and more income. This company experienced even more of that phenomenon, as it is near a popular summer beach resort. COVID-19 reduced tent and party rentals, but increased construction equipment rentals. Because of this, the equipment rental company appeared to have an almost typical year. The selling owner had several businesses and had put very little time into this company in recent years. This sale was a first step towards his retirement. The company was being purchased by a long term manager and the purpose of the business valuation was to support an SBA 7(a) acquisition loan.
Business Valuation: Plumbing, Mechanical HVAC Service
The company primarily provided HVAC service work to a large base of residential homes and some light office space in an exurban community. They had $6M in revenues and are a highly profitable company. Much of their business was made up of small service and equipment replacement jobs, with some service contracts. They are particularly effective in internet marketing systems and have good Google and related reviews. They also had a good employee situation with plenty of trained techs. The purpose of this valuation was for partial bank financing of a family transition.
Harvest Business, LLC also commonly called The Art of Business Valuation is an expert business valuation firm that provides business valuations nationally. Our lead valuator Gregory R. Caruso, JD, CPA, CVA, has performed hundreds and hundreds of business valuations and provided training and continuing education for leading business valuation, accounting, and legal programs. Your business value is worth our quality service and experienced business valuation judgment. If you have any questions or need a business valuation for any purpose reach out today.
Thank you for having me. The attached slides are available in conjunction with our SBA 7(a) Loan – SBA Business Valuation Presentation. Note, the SBA often refers to business valuations as SBA business appraisals.
In our SBA Business Valuation / SBA Business Appraisal Presentation we cover the following three topics.
Very high level business valuation theory. Namely why we cannot just average the last three years financials and select a multiplier or other risk adjustment factor and come up with a value.
SBA Business Valuation particulars. What you need to know and do to get a business valuation quickly and easily.
Covid-19 aftereffects (we hope) and how we work with financial “holes” and “bubbles” etc. so you and your client can be prepared.
