You find out within weeks (sometimes days) before your closing that the SBA required business valuation came in below the selling price and the lender is making it an issue. In today’s market we’re seeing multiples increase on better businesses as fewer listings seem to be available and buyers are plentiful. So how do you address this and what is the lender’s position on moving forward to close when a value comes in low.

Working with broker offices around the country allows me to better understand the differences in local broker markets’ knowledge of SBA. It surprises me to learn that many basic SBA rules, that every broker should be aware of, are not discussed in more local meetings. Today I’m addressing a few optional rules relating to business valuations and real estate appraisals that many brokers don’t realize can stop or delay your closing.

Let’s start with the most important rule you need to understand and how it’s changed over the years. Prior to 2013 the SBA had a rule in place which stated that any business transfer financed using SBA must have a valid business valuation amount at or above the selling price. This rule would not allow a higher selling price than the business valuation and the price had to be adjusted down to meet the BV value. Post 2013 and the financial crash of 2010, the SBA adjusted this rule to address the fluctuations in appraisal amounts amongst the appraisal firms. The current SBA rule allows for selling prices to be higher than the valuations as long as the SBA loan amount remains at or below the business valuation amount. The actual rule states:

     i)  Any amount(s) of the loan proceeds that will be used to facilitate a change of ownership may not exceed the business valuation.

This new rule change now accounted for selling prices to be higher than valuations if the differences were not coming from SBA loan proceeds. It allows for seller financing, additional buyer injection, or any third-party to bridge this gap provided the cash flow can support it. In many cases the resolve would be a seller note on stand-by if the cash flow could not support the new debt. The answer seemed easy until many internal lender policies demanded the BV continue to meet the selling price, in short, this became an “Optional” rule change and was now up to the lender to accept. Many lenders are of the belief that it is in the best interest of the buyer to prevent a transaction closing that is not 100% supported by the business valuation. When lenders take this stance, we recognize that they do not fully understand the buyer, transaction, actual industry or overall benefit to the buyer. We demand that our lending partners recognize this rule and allow the option to bridge the gap through other avenues and not delay our loan progression.

The second rule change that happened during the 2013 SBA updates included a new real estate clause as well. Reacting again to current market conditions, SBA recognized that many real estate appraisals were coming in lower than the selling prices. This change now allowed for appraisals to be at 90% or higher of the selling price to not be questioned by the SBA during a file audit. The buyer needed to recognize and provide a statement as to why they believe the appraisal to be lower than actual market value. The actual rule is as follows:

 a) If at time of closing the appraised value:

i)  Is 90% or more of the estimated value, the Lender may close the loan but must include a written explanation as to why the appraisal is less than the estimated value in the loan file; or

When it comes to the SBA third party reports required to close a loan, you must remain involved and understand when and how to address any arising concerns during the process. Do not always take for granted that the lender has the final say as many times they just need to be better informed or reminded of certain rules. Stay up to date on these items to ensure the deal closes. Feel free to reach out to us with any questions you might have on any transaction you’re working on, we’re here to help.

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You can reach out directly to me at Stevem@easysba.com or my direct dial at 919.376.2922.

I hope today’s letter was informative and please feel free to share with anyone that you believe can benefit from it. We are dedicated to the success of the intermediary.

Steve Mariani

Owner, Diamond Financial Services

(888) 238-0952