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, 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 several 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.
An independent third party must do the valuation.
An independent third party must do the Business valuation. The SBA lender or the bank processing the SBA loan cannot provide this written valuation. The SBA requires a third-party business valuation and ensures that all aspects are reasonable. Click here for more information about why you need an appraisal to get an SBA loan
The basis for business valuation is the cash flow of the business. SBA lending is a cash flow lending. That is, the SBA is not an opportunity lender where an entrepreneur may say, “I have the best idea since sliced bread.” The SBA is not in the business of assessing and evaluating new ideas. The SBA’s interest is in more proven business models that generate a positive cash flow.
Previously, some business valuations were not written with sufficient 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 unrealistic expectations 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 protects the deal between the Seller and the buyer.
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 need 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 involves all parties in the transaction. In this scenario, a third-party valuation benefits all parties. It allows each party 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 unique to the United States of America.
The SBA program is a significant benefit to the US economy. Very few, if any, countries in the world offer a similar third-party lending program for small businesses. Where there is no SBA program, financing must come from a bank or the Seller. Banks are generally willing to lend some money. However, with small business loans to buy a business, they often find the risk too high. This is where the SBA comes in. Due to its size and backing of the Federal Government, there is a higher risk tolerance.
If 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 Broker’s 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 at (Toll-Free): (844) 414-9700