Do you need a Business valuation to get an SBA loan?
Getting finance to buy and sell a business from an independent third party such as an SBA lender since August 2008 has been very difficult. As part of the Federal stimulus plan in 2009, money was allocated to the SBA to try and kick start lending and this includes the elimination of a number of buyer fees to obtain an SBA loan. However, one of the recent changes to the SBA loan program has seen the introduction of the need for a business valuation if the loan is going to be approved.
The Business valuation must be done by an independent third party. The SBA lender or the bank processing the SBA loan cannot provide this written valuation. The SBA wants to see the Business valuation is done by a third party and that everything is reasonable. Click here more information about why you need an appraisal to get an SBA loan
The basis for the Business valuation is the cash flow of the business. SBA lending is cash flow lending. That is, SBA is not an opportunity lender where an entrepreneur may say “I have the best idea since sliced bread.” SBA is not in the business of assessing and evaluating new ideas, they are more interested in proven business models that are generating a positive cash flow.
Previously, some of the Business valuations were not done with enough detail. You’ve no doubt heard the expression – garbage in equals garbage out. So the SBA wants to see appraisals that are written correctly.
A further reason the SBA wants to see an appraisal is that it helps both the seller and the buyer.
In the case of the seller, it provides a reality check on the value of the business. Many sellers have an unrealistic expectation about the value of their business. This expectation comes with them into meetings with buyers and forms part of their decision making process making it difficult to bring the seller and buyer together.
A Business valuation helps close that expectation and it also helps when the SBA says it will provide some funding but that the seller may be required to carry a note as part of the purchase price. For example, if the seller and buyer have agreed on a $1,000,000 purchase price for the business, the buyer brings a down payment of 20%, the SBA lender will provide 70% and the seller will carry a note for 10%.
This approach to finance spreads the risk and has all parties involved in the transaction. In this scenario, a third party valuation helps all parties as it allows each of them to see the value of the business, understand what money they need to bring or carry and thereby keep negotiations on an even keel.
The SBA program is a great benefit to the US economy. Very few, if any, countries in the world offer a similar third party lending program for small business. Where there is no SBA program, the lending has to come from a bank or the seller, with banks generally willing to lend some money, but not take the same level of risk the SBA has been able to carry, due to its size.
f you would like to know the value of your business or simply get more information, click this link to get a free sample of a Brokers Opinion of Value – Sample business valuation
For more immediate help you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.