NEW SBA SOP 50 10 5 (J) Released - Updates Regarding Business Valuations
The new SBA SOP 50 10 5 (J) was released recently with an effective date of January 1, 2018. Download the full SBA SOP 50 10 5(J) here: SBA SOP 50 10 5(J)
There were a few changes from SOP 50 10 5(I) regarding business valuations as outline below:
- The SBA has changed the term "business appraisal" to "business valuation". This will make it consistent with the valuation industry.
- New requirements for equity injection for all change of ownership loans. SBA considers an equity injection of at least 10 percent of total project costs. Seller debt may not be considered as part of the equity injection unless its on full standby for the life of the SBA loan and it does not exceed half of the required equity injection.
- Along with the changed term to business valuation, there was also minor changes to the wording and structure of some sentences. See below for a summary of the business valuation requirements.
Business Valuation Requirements – Change of Ownership
Lender's loan documentation must include a current business valuation (not to include any real estate) by the Lender or an independent third party hired by the Lender with proven experience in business valuations. (Certain business valuation requirements apply)
The value of the intangible assets is determined by either the book value as reflected on the business’s balance sheet, a separate appraisal for the particular asset, or the value of the business as identified in the business valuation minus the sum of the working capital assets and the fixed assets being purchased.
An appraisal or other valuation by an independent third party is required if the valuation of the fixed assets is greater than the depreciated value (net book value). A valuation of the fixed assets provided as part of a business valuation will not meet these requirements.
Determining the value of a business (not including real estate which is separately valued through a real estate appraisal) is the key component to the analysis of any loan application for a change of ownership. An accurate business valuation is required because the change in ownership will result in new debt unrelated to business operations and potentially the creation of intangible assets. A business valuation assists the buyer in making a determination that the seller’s asking price is supported by an independent qualified source.
A “qualified source” is an individual who regularly receives compensation for business valuations and is accredited by one of the following recognized organizations: (a) Accredited Senior Appraiser (ASA) accredited through the American Society of Appraisers; (b) Certified Business Appraiser (CBA) accredited through the Institute of Business Appraisers; (c) Accredited in Business Valuation (ABV) accredited through the American Institute of Certified Public Accountants; (d) Certified Valuation Analyst (CVA) accredited through the National Association of Certified Valuation Analysts; (e) Accredited Valuation Analyst (AVA) accredited through the National Association of Certified Valuation Analysts; and (f) Business Certified Appraiser (BCA) accredited through the International Society of Business Appraisers.
If the amount being financed (including any 7(a), 504, seller, or other financing) minus the appraised value of real estate and/or equipment is greater than $250,000 or if there is a close relationship between the buyer and seller (for example, transactions between family members or business partners), the lender must obtain an independent business valuation from a qualified source.
In order for the individual performing the business valuation to identify the scope of work appropriately, the business valuation must be requested by and prepared for the Lender. The scope of work should identify whether the transaction is an asset purchase or stock purchase and be specific enough for the individual performing the business valuation to know what is included in the sale (including any assumed debt). The business valuation must include the individual’s opinion of value, the qualifications of the individual performing the appraisal and their signature certifying to the information contained in the appraisal. The Lender may not use a business valuation prepared for the Applicant or the seller. The cost of the appraisal may be passed on to the Applicant.
If the application will be submitted to the LGPC, the business valuation must be submitted as part of the loan application.
Any amount(s) of the loan proceeds that will be used to facilitate a change of ownership may not exceed the business valuation.
Please reach out to Brandon Hall at firstname.lastname@example.org or 763-898-8653 if you have any further questions regarding business valuations for SBA purposes.