The Impact of SBA Financing on Business Valuations

Many people think that business valuation is a process that is fixed and constant. In other words, if you apply the right formula, you can come up with the value of your company. The reality is that business valuations are always in flux and the process of business valuation can be heavily driven by current market conditions. In this article, we will discuss the impact of SBA lending on the business valuations companies are able to achieve today.

In the realm of small business, the SBA, or Small Business Administration, plays a large role in the financing of business purchases. Banks are usually delighted to lend money on a property purchase. However, business purchases are considered riskier than real estate purchases are. Therefore, banks usually do not lend money for business purchases unless the federal government steps in and guarantee the majority portion of the business loan through the SBA. SBA loans can be used not only for purchasing an existing business, but also for endeavors such as company expansion and equipment purchases.

The ease and availability in which SBA loans can be obtained by business buyers can greatly affect the business valuation of one’s company. For instance, appropriated funds for SBA lending in the 2015 fiscal year were originally approved by Congress at $18.75 billion. At the current rate of loan approvals, all program appropriations would be used up by mid-August 2015. In other words, if our legislators did not raise the SBA appropriation limit in time, banks would not be able to fund SBA loans. It doesn’t matter if one’s company is worth $3 million. If no one could obtain financing to buy the company for $3 million, the business valuation is just a number on paper. The SBA appropriation shortage crisis was later resolved, but it reminded all of us in the business brokerage and mergers and acquisitions community that a business valuation is only as good as the buyer’s ability to obtain financing to buy the business at that valuation.

While the economy in many parts of the U.S. has seen a good amount of growth and recovery, many banks are reluctant to be too liberal with the approval of business acquisition loans. Since the Great Recession of 2008, the business brokerage community has seen a significant reduction in the number of SBA loans approved. Today, many banks are willing to fund SBA loans, but add on many requirements that were not common prior to 2008. For instance, the down payment requirement has increased from as little as 10% before to 25% now. Banks like seller financing more than ever, and often want to see the seller finance 10% to 15% of the purchase price. Many banks also require the seller to receive no payment on the seller note for two years. After that, the seller note needs to be amortized over a number of years at a reasonable interest rate so that the cash flow of the business is sufficient to pay the bank loan and the seller note. Buyers are often required to have at least two years of experience in the industry. Some banks are even requiring at least 50% of the purchase price be allocated to equipment (as opposed to the majority of the purchase price being allocated to goodwill), the consequences of which include the seller potentially ending up with a higher ordinary income tax consequence, the buyer potentially ending up with a higher use tax at closing, and the business valuation suffering because the buyer is financially strapped due to higher tax consequences.

An accurate business valuation should be performed by a business valuation professional who understands the ins and outs of current market conditions. Deriving the value of one’s business is not as simple as plugging in a formula and ending up with the result. Market conditions change all the time, and a competent business valuation advisor will be able to incorporate all the factors to give you an accurate and realistic business valuation.

Advantage Business Valuations provides business valuation services for small to mid-sized business owners in the United States. Founded by Aaron Muller who has valued thousands of companies as a business broker, Advantage Business Valuations helps small to mid-sized business owners determine the value of their business with ease and confidence. To discover the value of your business, visit

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