- SBA lenders require third-party business valuations for acquisitions over $250K or when goodwill is involved.
- The income approach (based on earnings capacity) is the most important valuation method for SBA loans.
- Most small business acquisitions use SDE multiples ranging from 1.5x to 5.0x depending on industry and business quality.
- If valuation comes in below purchase price, you may need to renegotiate, increase your down payment, or provide additional documentation.
When you’re buying a business with an SBA loan, lenders need to verify the purchase price is reasonable. This is where business valuation comes in. Understanding how SBA valuations work helps you prepare for the process and avoid surprises.
Why Valuation Matters for SBA Loans
Protecting the Loan
The SBA requires lenders to verify that acquisition prices are reasonable. If you overpay for a business, you may struggle to repay the loan—creating risk for both you and the lender.
What Lenders Are Checking
- Is the purchase price reasonable? Does it align with industry norms?
- Can the business support the debt? Will cash flow cover loan payments?
- What are the underlying assets? Real estate, equipment, goodwill breakdown
Lenders typically order independent third-party valuations to get an objective assessment, separate from the negotiated purchase price between buyer and seller. This protects everyone involved in the transaction.
When Is Valuation Required?
SBA Requirements
Per SBA SOP 50 10 8, a third-party business valuation is required when:
- The acquisition includes goodwill or other intangible assets
- The total acquisition price exceeds $250,000
- There’s a significant gap between asset value and purchase price
Lender Discretion
Many lenders require valuations for all business acquisitions regardless of size. Even if SBA rules don’t strictly require it, expect your lender to order one for most deals.
Business valuations typically take 2-4 weeks to complete. Order timing affects your overall loan timeline, so factor this into your closing schedule when setting expectations with sellers.
Valuation Methods Used for SBA Loans
Income Approach
The most common method for SBA acquisitions. Values the business based on its earning capacity:
- Capitalization of earnings: Annual earnings ÷ capitalization rate
- Discounted cash flow (DCF): Present value of projected future cash flows
The income approach is preferred for operating businesses with consistent cash flow.
Market Approach
Compares the business to similar businesses that have sold recently:
- Comparable transactions: What have similar businesses sold for?
- Industry multiples: Standard multiples for the industry
Useful when good comparable data exists; challenging for unique businesses.
Asset Approach
Values the business based on underlying assets minus liabilities:
- Book value: Assets at accounting value
- Adjusted book value: Assets at fair market value
- Liquidation value: What assets would bring in forced sale
Often used for asset-heavy businesses or as a floor value.
For SBA acquisitions, the income approach typically carries the most weight because it reflects the business’s ability to service debt—the lender’s primary concern.
SDE vs. EBITDA in Valuations
Understanding the Difference
Both metrics normalize earnings, but they’re used differently:
| Metric | Used For | Key Difference |
|---|---|---|
| SDE (Seller’s Discretionary Earnings) | Owner-operated businesses | Adds back owner’s salary |
| EBITDA | Larger businesses with management | Assumes owner is replaced |
Which One for SBA?
Most small business acquisitions (under $5M) use SDE. The buyer will work in the business, so owner compensation is part of the value equation.
Converting Between Them
SDE = EBITDA + Owner’s Compensation
A business with $300,000 EBITDA and $150,000 owner salary has $450,000 SDE.
Common Valuation Multiples
SDE Multiples by Industry
| Industry | Typical SDE Multiple |
|---|---|
| Service businesses | 2.0x – 3.0x |
| Professional services | 2.5x – 4.0x |
| Manufacturing | 3.0x – 5.0x |
| Restaurants | 1.5x – 2.5x |
| Retail | 1.5x – 2.5x |
| Healthcare practices | 3.0x – 5.0x |
| Technology/software | 3.5x – 6.0x |
Factors That Increase Multiples
- Recurring revenue
- Diversified customer base
- Strong management team
- Growth trajectory
- Defensible market position
- Real estate included
Factors That Decrease Multiples
- Customer concentration
- Owner dependency
- Declining revenue
- Aging equipment
- Industry headwinds
- Weak margins
What SBA Lenders Look For in Valuations
Valuation vs. Purchase Price
Lenders compare the third-party valuation to your negotiated purchase price:
| Scenario | Outcome |
|---|---|
| Valuation ≥ Purchase price | Good — price is supportable |
| Valuation slightly below | May be acceptable with explanation |
| Valuation significantly below | Problem — may need to renegotiate |
DSCR Impact
Valuation informs debt service coverage ratio (DSCR) analysis. If the valuation suggests lower earnings than expected, DSCR may not meet minimums.
Collateral Consideration
The asset breakdown in the valuation helps determine collateral position—tangible assets vs. goodwill.
Preparing for Your Valuation
Documentation Needed
Provide the valuator with:
- 3 years of business tax returns
- Monthly P&L statements (trailing 24 months)
- Balance sheet
- Asset list with values
- Customer concentration data
- Organizational information
- Industry/competitive context
Add-Backs Documentation
Document all legitimate add-backs with evidence:
- Owner salary and benefits
- One-time expenses (clearly documented)
- Personal expenses run through business
- Non-recurring costs
Valuators often have follow-up questions. Quick responses keep the valuation on schedule. Delays in providing information can push your closing timeline back by weeks.
When Valuation Comes In Low
Why It Happens
- Valuator used conservative assumptions
- Market comparables were unfavorable
- Add-backs weren’t properly documented
- Recent financials weaker than expected
- Industry-specific concerns
Your Options
- Renegotiate purchase price: Use valuation as leverage with seller
- Increase down payment: Reduce loan amount to match valuation
- Provide additional support: Documentation that valuator missed
- Request rebuttal: Challenge specific assumptions with evidence
- Walk away: If the gap is too large and cannot be bridged
Discuss the valuation shortfall with your lender immediately. Sometimes modest gaps can be addressed through deal structure adjustments—more equity, seller note on standby, or price reduction. Don’t assume a low valuation automatically kills the deal.
A solid third-party valuation supports your acquisition and loan approval. Prepare thoroughly by documenting add-backs, providing complete financials, and responding quickly to valuator questions. If the valuation comes in below your purchase price, you have options—renegotiate, increase equity, or provide additional documentation. The key is working proactively with your lender to find a path forward.
Frequently Asked Questions
The buyer typically pays for the valuation as part of closing costs. Costs range from $3,000-$8,000 depending on business complexity.
Typically 2-4 weeks from engagement to final report. Providing complete documentation upfront helps speed the process.
Usually no. Lenders require an independent third-party valuation from an approved appraiser. Your own valuation may be used as supporting documentation.
Great news—it suggests you’re getting a good deal. The lender will use the lower of valuation or purchase price for loan purposes.
Business valuations typically focus on the operating business. Real estate is usually valued separately through a commercial real estate appraisal.
