If your company needs working capital or you are considering expansion, obtaining a business loan may be the most straightforward approach. During the process, potential lenders may require an independent valuation to ensure the deal is secure. Here are some thoughts on how best to approach this important step towards having your request approved.
If your loan is backed by the Small Business Administration (SBA) or a similar government program, it will often require an appraisal. SBA loans cannot exceed the appraised value of the business, inclusive of any owned real estate or equipment assets. Private bank lenders may also have similar guidelines for business appraisals to obtain financing approval.
Ultimately, an appraisal protects both your interests and those of the banks. It may not make financial sense to acquire more debt than you need or more than what your business is worth. It is also advantageous to understand your company's true market value and have a few financing options in place before you close on a deal.
As the business owner seeking the loan, you should explore multiple options, including 2-3 local banks and even the possibility of raising the funds through private equity investment, especially if there is a shortfall to the bank's approval amount.
As for finding the right appraisal firm, the bank may select its own to complete the appraisal, or ask you to take the time to research and engage with one. In both cases, ensure the appraiser is certified and has sufficient training, knowledge, and experience to complete the valuation.
The professional appraiser will conduct independent research on the business and review your documentation to estimate the company's value. They will rely on commonly accepted methodologies, such as the asset, income, and market approaches.
As the business owner, you will need to facilitate the process by working with the appraiser and providing the required documentation while answering questions specific to your company's history and future outlook.
Once the valuation is complete, a report will be prepared and submitted to you and the lender. You should carefully review it to better understand the factors contributing to the business value, including associated goodwill and tangible assets. Down the road, consider using the report for assistance in insurance, tax, and accounting purposes.
In summary, while it's always a good idea to stay current with your firm's valuation, it will likely be a critical requirement to secure the funds needed for its continued growth and success.