Business Valuation Blog | Understanding Buying / Selling a Company

Business Appraisal Requirement for Bank Financing

Posted by Business Valuation Specialists LLC on Mar 29, 2021 8:00:00 AM

Business Valuation Appraisal Bank


When you seek financing to purchase a business, it is typical that potential lenders will require an independent valuation to ensure the deal is sound. They want to confirm the sale price is reasonable and the business itself is financially viable, to mitigate the risks involved with the investment. Learn what it means to work with a reputable valuation firm to better understand this important part of the loan approval process.

Is a Valuation Required for a Business Loan?

Many lenders require that you have a company valuation performed by an appraiser. If your loan is backed by the Small Business Administration (SBA) or a similar government-backed program, they will often require an appraisal. SBA loans cannot exceed the appraised value of the business, inclusive of any real estate or equipment assets being acquired as part of the sale. Private bank lenders will have similar guidelines for business appraisals for financing approval.

As the buyer seeking the loan you should have additional money-raising plans in place, should the appraisal come in lower than the purchase price of the business. You can decide to raise the funds through private equity, use personal capital to make up the difference, or even go back to the seller and renegotiate the sale.

Ultimately, the appraisal protects your interests as a buyer, as well as the bank's interests as a lender. It may not make financial sense to purchase the business at a premium above what it’s worth unless you have ulterior reasons for doing so. For example, in a seller’s market, where there were other bidders involved in the sale process, or if you needed to acquire the business as part of a growth plan. Either way, it is better to understand the true market value of the business and have all financing options in place before you close the deal.

What Happens During the Business Appraisal Process?

The bank may select their own valuation firm to do the appraisal or have you select someone. In both cases, ensure the appraiser is certified, with sufficient training, knowledge, and experience to adequately complete the valuation. The appraiser will perform independent research on the business and review your documentation to estimate the worth of the company. They will rely on commonly used methodologies, such as the asset, income, and market approaches.

As the buyer, you will need to facilitate the process of working with the seller, lender, and appraiser to ensure the documentation needed is available and accurate based on your prior due diligence review. It is in the seller's interests that the appraisal meet their price too since they want the deal to close.

Once the valuation is completed, a report will be prepared and submitted to the lender, who will distribute the report to the appropriate parties. As a buyer, you should review the report to better understand the valuation of the business and its associated goodwill and tangible assets. You may also want to consider using the report to assist in insurance, tax, and accounting purposes.

In summary, you can rest assured that if an appraisal requirement coincides with you obtaining the best financing option for your new company, Business Valuation Specialists LLC will be there to guide you through the process efficiently and effectively.

Tags: business valuations, business appraisal, bank financing, SBA Loan, loan

How can you use business valuations for SBA loans?

Posted by Business Valuation Specialists LLC on Sep 20, 2017 10:14:00 AM


Whether you're a first-time business owner or a multi-company veteran, going through the process of setting up a business loan can be truly nerve-wracking. Fortunately, when you use business valuations for SBA loans, you're helping provide solid evidence of your company's value. Why? Let's take a look.

How can you use business valuations for SBA loans?

Though there are many circumstances under which you can qualify for an SBA loan without a business valuation, the 2008 market crash and ensuing government regulations tightened up many of these options. But in what circumstances may you be required to get a valuation?

  • Any 7(a) guaranteed loan will require a business valuation to be performed.
  • Refinancing debt that was originally used to handle a change in ownership may require an appraisal.
  • The buyer and seller are closely related, such as a family member or business partner, to ensure the value is correctly stated.
  • If a significant portion of the business' asset is tied up in real estate, as the value may not hold if the property value falls.
  • When the amount being financed is greater than $250,000 beyond the appraised value of real estate.

But beyond the requirement of having a business valuation performed to help secure your SBA loan, there are many other reasons why it's just a good idea. A business valuation provides you with a solid point to negotiate from if you're buying or selling a company. It validates the asking price you're presenting to either a prospective buyer or to your loan officer. This verification of value also provides you with a basis for an insurance claim if your business suffers from a natural disaster, fire or similar crisis.

Another area where this type of information comes in handy is in your initial bookkeeping when you purchase a company. When you receive a business valuation report, you can then use it to allocate value to your different assets, allowing you to determine your depreciation schedule and similar areas of interest for your accounting purposes.

Speaking of accounting, do you know how the company has performed in the past? Part of the process for income-based appraisals involves taking a good, hard look at the business' income. Is it regular or irregular? Should the cost you're paying represent several years of slow-burning market building or the phenomenal sales it's seeing right now? An experienced, certified business valuation specialist can help determine which of these approaches are appropriate in your circumstances and that will be reflected in the report they create.

What about if you're considering buying into a partnership? A business valuation provides strong documentation of the company's performance and your expected benefit from that past performance into the future. It looks at a wide range of factors and can help you figure out where your prospective company is strong and where it is weak. This allows you to quickly make changes that will create strong returns on your investment.

By using business valuations for SBA loans, you're ensuring that your prospective business is not only a good investment, you're backing it up with solid proof on the matter. But before you go with just any business valuation firm, make sure that they are certified and have experience with similar companies in your area. Why? The certification process ensures your business appraiser knows the best methodologies to apply to your specific situation.

Tags: bank financing, SBA Loan

Why do I need a business valuation for bank financing?

Posted by Business Valuation Specialists LLC on Aug 23, 2017 2:24:00 PM


When you're working on securing a business loan, the last thing you may be thinking about is a business valuation. However, it should actually be one of the first aspects you should consider. When you get a business valuation for bank financing, you actually receive a much greater benefit than a simple figure that sums up your company's value, and the information it provides your financial institution makes it much easier to get through the paperwork and get to running your business.

Why do I need a business valuation for bank financing?

When you're trying to secure bank financing, the financial institution you're working with may require you to have a business valuation performed on the company you're purchasing or already own. When the housing bubble burst in 2008 and the various industrial bailouts happened, there were many new regulations put into place that require entrepreneurs to prove better intention of paying back the loans they had taken out. That lead to a tightening of the approval process. Fortunately, this is one area where having a business valuation performed by a certified business appraiser can help you secure your loan more easily.

When appraisers go through the certification process, they learn not only how to value a business, but how to do so using a series of standardized methodologies. Why? As the appraisal process has moved forward, there have been plenty of opportunities to test appraisal calculations and processes in legal, insurance and financial circles. Those calculations that did not bear out have been eliminated from standardized practice over time while those that worked well have been upheld time and again. 

As time progressed, the certification process began to include the methodologies that have worked well. Because these methodologies have been used time and again, business valuations performed by certified appraisers began to hold more weight. In financial circles, banks and other financial institutions have come to realize that a business appraisal report completed by a certified appraiser is much more likely to have accurate values, so they don't need to worry about losing money.

But the appraisal report contains much more than a simple figure determining your company's value. It also contains information about where your company is strong, and where it is weak. It provides you with dynamic insights to help you improve your business' poor performance in some areas while allowing you to grow the practices and processes that have lead to areas of strength. It will give you a solid overview of the condition of the market, your competitors and where you fit into your industry as a whole. By having this information and taking action based on the report, you can quickly improve your business' bottom line and overall value, whether it's by revamping your accounts receivable process, expanding your research and development department or any other improvements you find wanting.

As you can see, getting a business valuation for bank financing provides you with significantly more information than what you may expect, but how you use that information to your company's benefit is up to you. By harnessing that information, you can quickly create a more dynamic, responsive business. In our current age of digitization and disruption, a business valuation provides you with the insights and flexibility you need to keep your business ahead of the curve.

Tags: bank financing, SBA Loan

How can a business valuation help secure an SBA loan guarantee?

Posted by Business Valuation Specialists LLC on Apr 6, 2016 11:00:00 AM


If there's anything that's certain in business, it's that dealing with the government is probably going to take longer and be more complicated than you'd like. But there are also a variety of agencies that help the little guy out, including the Small Business Administration (SBA). One of the most popular programs the SBA offers is its SBA loan guarantee program. Rather than being a direct loan, it provides a guarantee that the loan will be paid back to the lender if the business fails. But for some of the loan programs, the SBA requires a business valuation performed. Here's why.

How can a business valuation help secure an SBA loan guarantee?

  • A business valuation performed by a certified business valuations specialist ensures that the valuation has been performed to a certain standard and using accepted methodologies. This means that it's an accurate picture of your company's financial state and shows the SBA that the loan they're guaranteeing is being put into a company with solid assets and a good chance of paying back the loan.
  • Many business owners make the mistake of basing their company's worth on their tax accounting records. Though these documents are accurate for their purposes, they don't always reflect the accuracy that business appraisals offer. As an example, if a piece of equipment is purchased in a tax year, it's often depreciated over a particular period of time set by the government's depreciation table. Does that mean that the equipment has no value once it's been fully depreciated? No. If you base your application on those records it may reflect a much lower level of assets than actually exists in the company.
  • Having a company appraisal performed also ensures that you know what kind of condition your company is in. There won't be any nasty surprises when you go to pay back the loan and realize there's a serious issue in your cash flow situation, industry outlook, expected income or similar concerns. You'll know where your company is strong and where it needs some improvement. A business appraisal gives you a solid look at how your company is performing well and where you need to invest some time and effort.
  • In what circumstances are business valuations needed for a loan guarantee? For most cases when special use property is not involved, the SBA guidelines allow a lender to perform their own company valuation if the amount being financed minus the appraised value of real estate and/or equipment being financed is $250,000 or less but requires an independent certified company valuation if the loan is for over that amount. Also, close relationships between buyers and sellers trigger the need for a valuation.  But you may want to have a business valuation performed independently if you feel the bank doesn't have a solid grasp of your business or industry, as the appraisal process is collaborative to a certain extent, allowing you to request a re-evaluation of some aspects of the valuation.

By having a business appraisal performed on your company, you're doing more than just ticking off a box on a checklist, you're finding out valuable information about the health of your company's financial situation. The valuation of a company can help you determine where your company is strong and where it needs work. If you need to have a company valuation performed, either for an SBA loan guarantee or for your own purposes, our certified business valuation specialists are ready to help.

Tags: bank financing, SBA Loan, SBA guarantee