| | Not All Business Valuations Are the Same | | When an SBA 7(a) loan involves the purchase of a business, whether structured as an asset sale or a stock purchase, a business valuation is required. The borrower doesn't order it. The borrower doesn't choose who performs it. The lender does. And depending on how seriously that lender takes the process, what comes back can look very different from one deal to the next. | What a Business Valuation Is | A business valuation is an independent assessment of what a business is worth. In the context of an SBA 7(a) loan, it serves a specific purpose: the lender needs to confirm that the portion of the purchase price being financed is supported by the actual value of the business being acquired. | | | | | Business Valuation Quality |
| Some reports come back 10 pages long, with half the report dedicated to the credentials of the person who wrote it Others are 50 pages or more, prepared by valuation firms that do this work at an institutional level The SBA does not mandate a specific format or a required level of detail. That gap gets filled by whatever the lender chooses to order Some lenders engage serious firms. Others check the box with whatever is cheapest and fastest
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| | | | | | My View From the Deal Desk |
| Requirement Versus Reality | The SBA requires a valuation. It does not require a good one. Those are two very different things. Some lenders will deliberately choose the bare minimum to speed up the process, believe business valuations carry less merit than cash flow, or simply don't care. Other lenders will rely heavily on it. | Business Valuations Are Liabilities | The valuation rarely comes in above the purchase price. In most acquisitions, it lands right at the purchase price or just below it. When it does come in higher, the difference is incremental. Excluding real estate, this is not a coincidence. Valuation firms are conservative by nature. Their reputation is attached to every number they put on paper. Coming in too high is a liability they are not willing to carry. Staying close to the agreed-upon purchase price is the path of least resistance. | The Valuation Reflects the Lender | The quality of the valuation reflects the quality of the lender's process overall; it is rarely an isolated detail. A lender that cuts corners on the valuation is usually cutting corners elsewhere, too. Some lenders run a disciplined process from application to closing. Others move fast and fill gaps along the way. |
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| | | The valuation is required. The quality is not. The lender controls the process. The borrower does not. How a lender approaches the valuation tells you something about how they approach everything else.
| | P.S. If you know a business owner, CPA, banker, broker, or attorney who might find this useful, feel free to pass it along. They can subscribe here. | | |
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