How to Address a Low SBA Business Valuation
SBA financing is a great source for individuals looking to buy a business. Buyers directly benefit by receiving affordable financing to buy a business. However, SBA lending comes with various criteria to meet that can be challenging. One challenge for SBA lenders is receiving an SBA business valuation that comes in lower than expected. A low SBA business valuation often raises several questions for buyers, sellers, and SBA lenders.
In this article, we discuss how SBA lenders can address a low business valuation. For additional guidance, it is important to work with a professional business appraiser like Peak Business Valuation.
As a professional business appraiser, Peak Business Valuation works with over 90 SBA lenders throughout the country. We can provide you with a professional business valuation and help you address a low business appraisal. Peak can also discuss any questions you have on SBA business valuations and low business valuations. Start now by scheduling your free consultation with Peak Business Valuation below!
Why Does a Low Business Valuation Happen?
There are several reasons an SBA business valuation may come in low. Understanding these factors is the first step toward addressing the price discrepancy. Below, we highlight a few common determinants of a low SBA business valuation.
- Missing or Incomplete Financial Information: SBA lenders and business appraisers rely heavily on accurate financial documentation. If a business’s financial records are incomplete, outdated, or poorly organized, the SBA valuation can come in lower than expected. This is common when financial statements do not reflect the full value of a business’s earnings or assets.
- Addbacks and Adjustments Not Considered: An important step in an SBA business valuation is considering owner compensation, discretionary expenses, and one-time costs. These “add-backs “ can significantly increase the business’s value. If these factors are not accounted for, the valuation may come in lower than it should.
- Broker-Set High Purchase Prices: Business brokers often set high initial asking prices to maximize the seller’s return. A professional SBA business valuation may reveal that the asking price was overestimated.
- Unrealistic Expectations from Sellers: In many cases, sellers cherish their businesses and may have unrealistic expectations about its value and growth potential. An SBA business valuation uses an objective approach to calculate the fair market value of a business. In this scenario, the valuation may come back lower than the seller’s asking price.
How Buyers and Sellers Can Address a Low SBA Valuation
A low business valuation may have different implications for both buyers and sellers of a business. This directly influences loan approval, the loan amount, and financial feasibility. For buyers, a low valuation typically means the SBA loan amount could be reduced. This may require them to come up with additional funds and may create financial pressure. For sellers, a low valuation can make their business less attractive and may push them to reduce their asking price and ROI. There are various steps SBA lenders can take to help buyers and sellers move forward with a low SBA business appraisal and secure a favorable outcome.
As a professional business appraiser, Peak Business Valuation helps SBA lenders throughout the country. We can provide you with an SBA business valuation and answer any questions you may have. Start today by scheduling a free consultation with Peak Business Valuation below!
Strategies for SBA Lenders to Address a Low Valuation
While a low SBA valuation can complicate an SBA lending strategy, SBA lenders have several options to address the issue. Below, we explore some common steps to consider when addressing a low business valuation. To learn more, see How SBA Lenders Can Address a Low Valuation.
- Set Realistic Value Expectations Early: SBA lenders can help set realistic expectations with buyers and sellers from the beginning, by explaining how SBA business appraisals work. Doing so can help SBA lenders prevent disappointment and friction during negotiations.
- Assess the Valuation Report: SBA lenders should thoroughly review the business valuation report to understand why the valuation came in low. Some key considerations include cash flow, debt, and the business’s growth potential. By understanding the reasons for the low valuation, SBA lenders can provide better guidance to buyers and sellers.
- Encourage Renegotiation: SBA lenders can encourage buyers and sellers to renegotiate the purchase price based on the valuation report. Aligning the price with the valuation ensures that the SBA loan is based on an accurate assessment of the business’s fair market value.
- Consider Alternative Financing Structures: SBA lenders can also offer alternative financing options. For example, subordinated debt or seller financing can help bridge the gap between the low valuation and the listing price. This ensures that the transaction moves forward and both parties are satisfied.
Conclusion
A low business valuation can cause problems for an SBA lending strategy. However, there are several steps SBA lenders can take to address a low valuation. By understanding the reasons behind the discrepancy, SBA lenders can work together with clients to reach a favorable outcome. If you need help navigating a low business appraisal, it is vital to work with a quality and experienced SBA business appraiser.
Peak Business Valuation, professional business appraiser, can help SBA lenders work through a low business valuation. We partner with over 90 SBA lenders throughout the country. In addition, we help individuals address low valuations on a regular basis. As such, Peak is here to provide you with an SBA business valuation and answer any questions you have on low business valuations. Get started now by scheduling your free consultation with Peak Business Valuation below!
