Liquidating an SBA loan can be a daunting process for lenders and business owners. As a business owner who is filing for bankruptcy or considering foreclosure, you should understand how the value of your business will impact your SBA loan. This article details why a business appraisal is necessary for an SBA loan liquidation. And how a valuation expert will value your company in such a circumstance.
Role of a Business Appraisal in Loan Liquidations
To determine the value of the loan collateral, a lender orders an independent opinion of value. This is a business appraisal. It is an expert’s written opinion as to the value of the specific property. An appraiser prepares this report for the lender and the SBA’s use regarding a specific SBA loan. A business appraisal is an essential part of the lender’s liquidation plan. The appraisal helps determine whether pursuing such collateral is cost-effective. This appraisal must be performed by an individual with the following qualifications:
- Education and Experience: Has the appropriate education, training, and experience required to develop a professional opinion as to the value of the specific type of property involved
- Certification: Has the necessary licensing, certification, and bonding requirements
- Independence: Has no actual, apparent, or potential conflict of interest with the SBA, lender, or borrower. And has no financial interest in the property to be appraised
Peak Business Valuation is a leading business appraiser in Utah. We provide valuations for liquidation purposes across the country for both lenders and business owners. Our goal is to help make the best of this difficult circumstance. Peak is a certified and credible firm with extensive experience in business liquidations.
What a Business Appraisal Report Includes
A business appraisal report for an SBA loan liquidation will contain the following:
- An opinion of value: the value of any item of personal property valued at more than $5,000 at the time the loan was made
- Type of valuation: liquidation or fair market value
- Purpose: How the appraisal is to be used
- The methodology, standards, resources, and markets the appraiser used or relied on
- A complete and accurate description of the collateral. This includes its current condition, photographs, and the manufacturer, model, and serial number of significant items of personal property, i.e., items with a liquidation value of $5,000 or more
- The date and location of the appraisal inspection
- The effective date of the valuation
- The appraiser’s certification that they have no financial interest in the property or conflict of interest with SBA, the Lender, or any Obligor
- The appraiser’s qualifications and signature
Liquidation Value vs Fair Market Value
When a lender is liquidating a business, a business appraiser will most often value the business based on the liquidation value rather than the fair market value. The liquidation value is the likely price the collateral will sell for if it sells quickly and with limited exposure to potential buyers.
This does not include cash or cash equivalents. Such cash items are valued at the net amount after deducting documented costs such as penalties for early withdrawal. Additionally, motor vehicle and stocks – items that can easily sell in the market – are based on industry standards. I.e. – the liquidation value of motor vehicles is based on NADA or Kelley Blue book value. The liquidation value of publicly traded stock is based on official stock exchange prices.
Whereas fair market value is the price at which a willing and able buyer and a willing and able seller would transact. Considering it is an open and unrestricted market and neither party is under compulsion to buy or sell. Additionally, both parties should have reasonable knowledge of relevant facts.
Depending on the purpose of the business appraisal, the valuation expert will determine how to value the business collateral for the SBA loan.
You should note, prior to liquidating the business there are many steps both the lender and the business owner should take. Some of these include payment deferrals in times of cash flow shortages. The business owner can sell the business or have another individual assume the loan. Workout plans or Offers in Compromise are also viable options. It is in the best interest of the lender, the SBA, and the business owner to try to recover the full value of the business.
Valuing a company for an SBA loan liquidation is a key step in the process for a lender to recover its SBA loan guaranty. According to the Standard Operating Procedure by the SBA, the SBA lender needs to substantiate the value of the collateral to ensure that the bank is close to market value as possible. Ultimately, the bank needs to get the best value for the collateral as it can for the taxpayers.
When a business appraiser values the company using the liquidation value, the value is often lower as the assets typically sell for less. This is because, during liquidation, a seller is looking to get as much cash as possible within a short period of time. In addition, liquidation value does not include intangible assets that can add significant value to a company.
If your business is facing bankruptcy or foreclosure, specifically involving an SBA loan, Peak Business Valuation has experts that can help. We provide credible business appraisals in Utah and across the country for a variety of circumstances to help lenders and business owners determine the value of a company. For any questions, please reach out via email or through a phone call.