SBA Business Valuation Requirements When You Buy A Business

Why SBA Requires A Business Valuation

When you buy a business with an SBA loan, most of the price is usually goodwill: the customer base, the reputation, the cash flow. Goodwill is real value, but a lender cannot sell it at auction. SBA's answer is to make sure an independent expert agrees the business is worth what you are paying before a lender finances it.

SBA's rulebook calls the valuation "the key component" of the analysis on any change of ownership. It does two jobs:

• It tells you whether the seller's asking price is supported by someone with no stake in the deal.
• It sets a ceiling on the debt. The SBA loan plus any seller note that is not on full standby cannot exceed the valuation.

The valuation covers the business only. If the building is part of the deal, it gets its own real estate appraisal, and its value is removed from the contract price to arrive at what SBA calls the Business Purchase Price.

Who Can Perform The Valuation

SBA requires a Qualified Source: a person who is regularly paid to value businesses and holds at least one of these credentials.

The appraiser must also be independent. That means no role in selling or approving the loan and no appearance of a conflict of interest. The finished report has to state a conclusion of value, list the appraiser's qualifications and carry a signed certification.

The Lender Orders It, Not You

This is the rule that surprises buyers most. The valuation must be requested by and prepared for the lender. The lender cannot use a valuation prepared for you or for the seller, even a good one from a credentialed appraiser.

That has three practical effects:

1. The broker's opinion of value does not count. The asking price in the listing, and any valuation the seller commissioned, are inputs. They are not the SBA valuation.
2. Your own valuation is still worth having. Many buyers do their own work on value before making an offer. It helps you negotiate. It just cannot replace the lender's report. See how to value a business for the methods.
3. The cost can be passed to you. The lender may charge you for the report, and money you spend on it counts toward your Down Payment. It can also be financed as part of the project.

The appraiser's scope of work has to say whether you are buying assets or stock and spell out exactly what is included, including any debt you are assuming. That is one reason a clear letter of intent matters. A vague LOI produces a vague scope.

The $350,000 Exception

For smaller deals SBA relaxes the rule. If the Business Purchase Price is $350,000 or less, the lender may value the business itself instead of hiring a Qualified Source. That exception does not apply when there is a close relationship between the buyer and the seller, such as family members or business partners. In that case an independent appraiser is still required.

This matters most for 7(a) Small loans and SBA Express loans, which can finance acquisitions under the same Appendix 15 rules.

How The Lender Checks The Numbers

A valuation is only as good as the financials behind it. So SBA requires the lender to get a copy of the financial information the appraiser relied on and verify it against the seller's IRS tax transcripts. If the seller's internal profit and loss statements show more profit than the tax returns, the valuation built on them will not hold up.

That is why the single biggest valuation risk is a seller whose real earnings are not on the tax returns. Cash businesses, aggressive personal expenses run through the company and late or amended returns all cause trouble. Read SDE and add-backs to see which adjustments appraisers and lenders accept.

When the Business Purchase Price is $3,000,000 or more, the lender also needs a Quality of Earnings report on an Initial Acquisition or Business Expansion. If the QoE finds lower earnings than the valuation assumed, the lender must use the QoE earnings to test cash flow, and the loan gets smaller to match.

When The Price Is Higher Than The Valuation

SBA's rule is direct: the valuation must support the Business Purchase Price regardless of how the debt is structured, and if you pay more than the valuation, the difference must be made up by equity. The debt cap works the same way. The SBA loan and any seller note that is not on full standby cannot add up to more than the valuation.

There is one helpful twist. Normally limited sources, like a seller note on full standby or minority investor money, can cover only half of the required 10% Down Payment. When the price is above the value supported by the valuation and QoE, SBA allows additional limited-source funds to cover the gap, as long as they are on full standby. In plain terms, the seller can carry the overage on a full standby note.

Now compare that with renegotiating. If the seller agrees to drop the price to the $1,700,000 valuation, the total project becomes $1,800,000, the Down Payment is $180,000 and the SBA loan is $1,620,000. You bring $220,000 less to closing.

You have three ways to close a valuation gap:

• Renegotiate the price down to the valuation. The cleanest fix, and the valuation gives you a neutral reason to ask.
• Ask the seller to carry the gap on full standby. The seller still gets the full price, just not all of it at closing.
• Bring more cash. Fine if you have it, but it raises your risk on day one.

Our guide to negotiating price and terms walks through how to have that conversation.

Real Estate Gets A Separate Appraisal

When the purchase includes the building the business occupies, the lender orders a commercial real estate appraisal in addition to the business valuation. The appraiser must be independent and state-licensed or state-certified (state-certified if the property is worth more than $1,000,000), the report must follow USPAP standards and be dated within 12 months of the application, and it must name the lender as the client. As with the business valuation, the lender cannot use an appraisal prepared for you or the seller.

Special purpose properties, like a hotel or self-storage facility where the building and business cannot be separated, follow extra rules. The valuation must split out land, building, equipment and intangibles. See buying a business with real estate.

How To Avoid A Valuation Surprise

1. Price off verified earnings. Make your offer on the earnings the tax returns support, not the listing's best-case number.
2. Run a quick cash flow test. If the business cannot cover its debt 1.25 times at your price, the valuation will likely struggle too. Our DSCR guide shows the math.
3. Write a valuation contingency into the LOI. Make the deal subject to financing, including a supporting valuation, so you can renegotiate or walk away.
4. Get pre-qualified early. A pre-qualification letter from GoSBA tests your price and structure against lender standards before you are deep into diligence.

For the full picture of how valuation fits with the rest of an SBA purchase, see our SBA business acquisition loan page.