Business Valuation Blog | Understanding Buying / Selling a Company

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.

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.