SBA SOP 50 10 6

SBA SOP 50 10 6 Overview

The SBA SOP 50 10 6 was released with an effective date of October 1, 2020. Download the full SBA SOP 50 10 6 here: SBA SOP 50 10 6.

There has not been much of any changes from the previous SOP 50 10 5(K) regarding business valuations. Most of the changes happened in 2018. One item that I found interesting is regarding SBA Express Loans

  • When it comes to SBA Express Loans, if the appraised value of a property is less than 90% of the estimated value, the lender may choose to close the loan. However, they must provide a written justification that includes a detailed analysis of the reasons for the low appraisal, as well as an explanation of any steps taken to offset the risk to the SBA, such as obtaining additional equity or collateral. This justification will be subject to review by the SBA at the time of loan guarantee purchase or during lender oversight.

Here is a summary of the requirements relating to Business Valuations – 

  • 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. 
  • 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) 
  • A “qualified source” is an individual who regularly receives compensation for business valuations and is accredited by one of the following recognized organizations:
    • Accredited Senior Appraiser (ASA) accredited through the American Society of Appraisers;
    • Certified Business Appraiser (CBA) accredited through the Institute of Business Appraisers;
    • Accredited in Business Valuation (ABV) accredited through the American Institute of Certified Public Accountants;
    • Certified Valuation Analyst (CVA) accredited through the National Association of Certified Valuation Analysts;
    • Accredited Valuation Analyst (AVA) accredited through the National Association of Certified Valuation Analysts; and
    • Business Certified Appraiser (BCA) accredited through the International Society of Business Appraisers. 
  • When using loan proceeds for a change of ownership, the amount cannot exceed the business valuation. However, the total purchase price can be greater than the valuation. The lender must provide an explanation for why the buyer is willing to purchase at a higher price, such as potential synergies.
  • 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 it is its on full standby for the life of the SBA loan and it does not exceed half of the required equity injection.
  • 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. 
  • 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 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. 
  • 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).
  • If the application will be submitted to the LGPC, the business valuation must be submitted as part of the loan application. 

In conclusion, it is important for Lenders to have a reliable and accurate business valuation when considering SBA loan applications from small businesses. By reaching out to our team for a business valuation, Lenders can be confident that they are obtaining a thorough and unbiased analysis of the business’s value, in accordance with the guidelines set out by the Small Business Administration (SBA) in SOP 50 10 6. Our team of experienced and qualified appraisers use the latest industry standards and techniques to provide a comprehensive valuation report, which can help Lenders make informed decisions about loan approval, terms, and conditions.  Reach out to our team today.

We look forward to working with you!

Brandon Hall