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.