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The Bottom Line?

Having addressed the primary issues related to the development and reporting of business valuation results within the context of SBA-guaranteed “change of ownership” financing, it would appear to be quite easy to “lose the forest because of the trees”.  The myriad differences between real estate and business appraisals, between the SBA establishment and the appraisal professions as well as the layers of laws, regulations, rules and standards which extend from FIRREA to the CFR and then to the SOP and USPAP and finally the professional valuation organizations are enough to prompt even the most determined of professionals to walk away from this arena.

On the other hand, the importance of the work performed by real estate and business appraisers cannot be understated.  When performed ethically and in accordance with the laws and regulations and standards, an invaluable service is provided to the public, the lender and the borrower.  The new SOP has definitely moved the business valuation component forward in a productive manner by mandating independent valuations performed by credentialed appraisers. The new USPAP (once it is deciphered and understood) has also moved the valuation profession forward.

Tying all of these changes together in the form of a suggested “modus operandi” for lenders and appraisers is what is needed now to further perfect the process.  In such a scenario, the key elements and decisions to be made include the following:

  1. Hiring Qualified Appraisers with SBA Experience
  2. Type of Report and Related Fees
  3. Appropriate Scope of Work Determination and Description

All other things equal, it is preferable for lenders to hire experienced appraisers who are familiar with the SBA programs and the unique aspects of the lending and valuation process. As discussed throughout this analysis, there are important issues which should be addressed “head on” and a lack of familiarity with such topics cannot be helpful. In order to optimize the overall program and to minimize the number of loan failures, selection of appraisers with years of experience seems logical.

Even if the fees are a bit higher, the quality of the return should also be higher.  It is true, at least to a certain extent, that you “get what you pay for”.  Valuation firms which offer low fees may or may not be meeting USPAP requirements with respect to the quality and quantity of their analysis. Carefully evaluating the borrower, company, industry and economy typically takes the bulk of time in a standard appraisal with the “valuation applications” involving more mechanical efforts. 

It is ultimately the ability of the appraiser to tie the qualitative and quantitative findings (SWOT analysis) to the development of capitalization rates, discount rates or multiples which leads to a meaningful and credible estimate of “value”. Doing so within the context of SBA acquisition or “change of ownership” loans requires a certain way of thinking which is perhaps more “transactional” than many other types of appraisals.

Finally, and perhaps most importantly, it is important that the lenders and appraisers come together to address head on the various “scope of work” issues that to date have been left more or less to chance or custom.  The issues raised earlier regarding the standard of value are critical in that there is a direct impact on the estimate of value which is derived and then compared to the negotiated deal price.  Clearly stating the type and depth of analysis that the appraiser will perform and noting the pertinent group of valuation approaches/methods should also be a priority. Finally, special situations will always arise which require both parties (lender and appraiser) to “think outside the box” and a “scope of work” discussion is the perfect forum for this type of analysis.

I will close by saying that I do not claim to have all of the answers to the many issues which exist in the SBA/Valuation arena – far from it.  I have attempted to pull together the different perspectives which have clouded the environment in recent years with the goal of furthering the benefits provided by the business appraisal profession to lenders, borrowers and taxpayers alike. Opinions as to what the SBA and SOP appear to require with respect to business valuation services are just that – opinions. Reasonable professionals will and do disagree as to what is required or recommended by the current SOP. Based on the tremendous progress made by the SBA in less than a two year period, it is reasonable to assume that further improvements with respect to clarity of expectations on the part of the SBA will be forthcoming. I welcome any comments or suggestions or critiques to what I have written here and look forward to working with anyone who might have similar aspirations.

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