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Does Your Business Valuation Meet the New SBA Requirements?

The addition of the Business Valuation Requirements to SOP 50-10 5(b) has prompted many questions from the lending and business valuation community. There has been an influx of business appraisers entering the market (some qualified but many unqualified) including so-called “National” firms with marketing skills that are outsourcing signatures just to meet the SBA’s “qualified source” rule. Even if the appraisal initially seems professional and acceptable for SBA loan purposes, a closer review if and when the loan begins to fail or does fail may place the valuable SBA guaranty at risk. What makes a business valuation compliant and more importantly, what steps should be taken to screen business appraisers? Business valuation review is easier than you think – follow these steps:

Review the Appraiser Qualifications

Prior to engaging a business appraiser, the lender should review the business appraiser’s qualifications including his/her designations and experience. SOP 50-10 5(b) – page 186 states that a “qualified source” is an individual who regularly receives compensation for business valuations and is either Accredited by a recognized organization or a CPA (who must conform to AICPA’s “SSVS”). The SOP quotes the “big 4” designations including ASA, CBA, CVA and ABV. If engaging a CPA, we strongly suggest that he/she has either the CVA or ABV designation as these designations were developed for CPAs. Finally, the lender should inquire as to the appraiser’s experience in valuing small businesses (as they bring a different kind of complexity compared to larger businesses) and obtain a sample report that will be similar in scope to the report they will receive. Ideally, the appraiser will have ample experience in performing valuations for SBA loan purposes owing to the unique environment which surrounds such loans.

Review the Certification/Signature Page

It is important to note that SOP 50-10 5(b) states “The business valuation must include the individual’s opinion of value, the qualifications of the individual performing the valuation and their signature certifying to the information contained in the valuation.” The SBA is clearly looking for the signature of the person preparing the report and this person having the appropriate qualifications / designations. A “Review Certification”, which simply would be an appraiser “reviewing” the report and agreeing with the conclusion DOES NOT meet the SBA requirement. This was confirmed with high level SBA personnel including Frank Pucci (SBA’s central loan processing).

Review Report Type/Scope of Work

The price of a business valuation can be a burden for the small business owner. To limit fees, many appraisers are providing scaled down services, but beware that these services may not meet the SBA’s business valuation requirement. Reading through SOP 50-10 5(b) clearly indicates that the SBA is looking for a Conclusion of Value. The lender should forgo appraisal engagements that are “Limited” in scope or “Calculation Reports”. Although not stated in the SOP, the SBA’s central loan processing checklist for “goodwill deals” asks if the business valuation conforms to USPAP. Therefore, we are operating under the assumption that the appraisal must conform to USPAP (similar to real esate).

Review Contents of the Report

A thorough business valuation can be a wealth of information to the lender. The business valuation should at least summarize the company history, operations, and provide adequate industry, regional and/or national economic analysis. More importantly, the valuator should discuss specifically how these factors impact the value. The valuator should discuss approaches considered or not considered, show the calculations involved in arriving at the conclusion of value, and discuss which methods were weighted and why. Does the valuation make sense?

Given the deal-specific nature of SBA business appraisals, it is also important that the appraiser provide insight into any unique contractual terms and conditions which impact the value associated with the subject company. For example, an “asset sale” which includes accounts receivable requires different valuation applications than a “stock sale” which excludes all liabilities, etc. Only experienced appraisers will recognize the importance of such differences.

Discuss and Memorialize the “Scope of Work”

Consistent with USPAP, the appraisal analysis and reporting should be consistent with the agreed upon “scope of work”. The more that lenders understand the nature and “value” of such appraisals, the more refined and beneficial the scope of work will become. The appraisal engagement document should be prepared by the lender and include the scope of work, fee level, turnaround time and other pertinent facts, conditions and requests related to the assignment.

For example, incorporating a reference to the new SBA form titled “Change of Ownership Guidance” (see form at end of article) within the business valuation scope of work will facilitate the efficient location of relevant information in the appraisal which can be referenced on this helpful form. This form was updated in June of 2009 and is designed to help expedite the timely processing of those loans which require SBA underwriting, e.g. loans with high amounts of goodwill and low amounts of buyer and seller equity or loans made by non-PLP lenders. The great majority of items referenced in this worksheet should be easily identifiable inside of the business appraisal report. Asking the appraiser to identify the specific report pages which address these major valuation issues is not an unreasonable request. The form can be found online through the following link:

Final Thoughts

The requirement for business valuations throws an entire new “compliance” factor to the already complicated SBA change of ownership loan process. However, similar to real estate appraisals, lenders will become more comfortable ordering and reviewing business valuations with time and experience. Since the borrower typically incurs the cost of any required business appraisal, why not ensure that an experienced and qualified appraiser is performing the analysis and that such work is truly helpful to the lender, the SBA and ultimately the borrower.

Mr. Gabehart is a Certified Business Appraiser with Gabehart Valuation Services in Phoenix, Arizona. Author of “The Business Valuation Book” (Amacom) and “Upstart Guide to Buying, Valuing and Selling Your Business” (Dearborn), he has appraised hundreds of businesses for SBA loan purposes and recently provided business valuation training to SBA underwriters in Sacramento and Hazard, Kentucky, other appraisers and SBA lenders. He can be reached at 602-692-0887 or

Mr. Mize is an Accredited Senior Appraiser (ASA) and partner with GCF Valuation in Tampa, Florida. GCF Valuation, family owned and operated, has been providing 3rd party business valuation services to the SBA lending community since 1997. Mr. Mize routinely provides training to lenders through NAGGL on the topics of business valuation, change of ownership and goodwill while various high level SBA personnel turn to him for important advice regarding the business valuation process. He can be reached at 813-258-1668 x 2 or

Authors’ Note

The great majority of items referenced in this worksheet should be easily identifiable inside of the business appraisal report, thereby enhancing the overall loan package submitted to the SBA. Asking the appraiser to identify the specific report pages which address these major valuation issues is not an unreasonable request.

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