Securing financing through the Small Business Administration (SBA) can be an excellent way to start, purchase, or grow a company. However, SBA loans often come with additional requirements compared to conventional financing. In many cases, SBA lenders rely on a business valuation to ensure the loan amount supports the company’s true economic value. Understanding the SBA business valuation requirements can help borrowers avoid delays and increase the odds of approval. In this article, we break down the basics of SBA business valuations and the requirements borrowers should be aware of.
As a professional business appraiser, Peak Business Valuation works with over 110 SBA lenders across the United States. We regularly assist buyers and lenders by providing independent business valuations that meet SBA guidelines. If you have questions about SBA business valuation requirements or receiving an appraisal, schedule a free consultation with Peak Business Valuation below.
What Is an SBA Business Valuation?
An SBA business valuation is an independent financial analysis that estimates a company’s fair market value. It involves carefully assessing items such as cash flow, assets, liabilities, industry conditions, and intangible value such as goodwill. When lenders issue SBA loans for buying a business or business-related assets, the valuation helps them assess risk, evaluate repayment ability, and determine whether the loan amount is reasonable.
Since SBA loans often involve higher lender risk, SBA lenders impose strict SBA business valuation requirements to mitigate the risk of default. For more information, see Requirements for an SBA Loan.
When Is an SBA Business Valuation Needed?
SBA business valuations are typically needed to approve financing for business transactions that involve a change of ownership. In these situations, SBA lenders need to determine whether the loan amount exceeds the company’s economic worth. In general, an SBA business valuation is required in the following scenarios:
- The transaction involves buying an existing business or buying out an owner.
- The SBA loan proceeds are used to finance goodwill or other intangible assets.
- The amount being financed (excluding real estate and equipment) exceeds $250,000.
- The transaction involves a close relationship between the buyer and seller, such as family members or existing owners.
If the financed amount is $250,000 or less and no close relationship exists, lenders may perform an internal valuation. However, an independent SBA business valuation can help reduce risk and support underwriting decisions in any scenario. If you have any questions about receiving an SBA business valuation, contact Peak Business Valuation today!
What Are the SBA Business Valuation Requirements?
The SBA outlines specific expectations regarding who can perform a valuation, how to prepare it, and how SBA lenders should use it. Below, we highlight the key SBA business valuation requirements that borrowers should understand.
The Business Appraiser Must Be Independent
One of the most important SBA business valuation requirements is independence. The valuation must be prepared by a qualified third-party business appraiser who regularly performs business valuations and receives compensation for those services. Additionally, the business appraiser cannot have a conflict of interest in the transaction. This ensures the analysis remains unbiased and objective.
The Engagement Must Be Ordered by the Lender
A business appraisal for an SBA loan must be requested by and prepared for the lender rather than the borrower or seller. This ensures the valuation is prepared specifically for SBA underwriting needs and properly reflects the structure of the transaction. The valuation should clearly identify whether the deal is an asset sale or stock sale and outline what is included in the purchase price.
At Peak Business Valuation, we regularly support SBA lenders with compliant business valuations. Our valuation reports are compliant and support SBA underwriting to help transactions move forward efficiently. If you are looking for a credible independent business appraiser, schedule a free consultation with Peak Business Valuation today.
The Business Valuation Must Exclude Real Estate
Another critical SBA business valuation requirement is that the business valuation must exclude the value of real estate. This helps SBA lenders focus on the operating business and its cash flow when determining whether the loan amount is reasonable. Mixing the value of real estate into the business valuation can create compliance issues and delay loan approval.
The SBA Loan Amount Cannot Exceed the Valuation
When SBA loan proceeds are used to finance an acquisition or ownership buyout, the total loan amount cannot exceed the final conclusion of value. This helps the SBA lender minimize the risk of a default. If the purchase price significantly exceeds the company’s reported value, lenders may require additional equity injection or renegotiate transaction terms.
Financial Information Must Be Verified
SBA lenders must verify the financial data used in the business valuation. This often includes reviewing historical financial statements and confirming that the numbers align with filed tax returns. Discrepancies between reported financials and tax filings can raise red flags and slow down the loan process. As such, it is vital for SBA lenders to thoroughly review the documents needed for an SBA loan.
The Valuation Must Include a Conclusion of Value
Finally, an SBA business valuation must include a final conclusion of value, along with supporting analysis, assumptions, and certifications. Moreover, the valuation report should clearly explain the valuation methods used and how the business appraiser arrived at the final estimate. This conclusion helps SBA lenders make informed underwriting decisions. As a trusted business appraiser, Peak Business Valuation prepares thorough valuation reports that comply with SBA business valuation requirements. If you have any questions, schedule a free consultation with Peak today!
For more guidance, the SBA Standard Operating Procedure (SOP) 50 10 outlines key business valuation and underwriting requirements for SBA loans.
Finding a Reliable Business Appraiser for an SBA Loan
Choosing the right business appraiser is critical to meeting SBA business valuation requirements. When finding a business appraiser, be sure to verify that they have one or more of the following SBA-approved credentials:
- Accredited Senior Appraiser (ASA)
- Certified Business Appraiser (CBA)
- Accredited in Business Valuation (ABV)
- Certified Valuation Analyst (CVA)
- Business Certified Appraiser (BCA)
In addition to the above credentials, it is best to work with professionals who have experience working with SBA lenders. This can help reduce friction during the underwriting process.
Meeting SBA Business Valuation Requirements
Adhering to SBA business valuation requirements helps SBA lenders assess risk, verify borrower repayment capacity, and ensure an appropriate loan amount. By understanding these requirements, borrowers can better prepare for the loan process and avoid unnecessary delays. One of the best ways to ensure an SBA-compliant business valuation is to work with a qualified appraiser who has experience working with SBA lenders.
Peak Business Valuation is a professional business appraisal firm with extensive experience in SBA business valuation. We work with dozens of lenders across the country to provide SBA-compliant valuation reports that support informed underwriting decisions. If you are preparing for an SBA loan or have questions about the valuation process, schedule a free consultation with Peak Business Valuation today.
