The SBA has released an updated version of its Standard Operating Procedures (SOP) 50 10 5(J), which is effective January 1, 2018. The following discussion highlights key revisions in the SOP which affect both business valuations and equipment appraisals, along with the author’s comments. 7(a) Loan Program –Business Valuations Requirements (pg. 196-198) Terminology […]
In the previous SBAvalue™ article Calculating Cash Flow (appraiser vs. lender), we discussed how a business appraiser calculates Seller’s Discretionary Earnings (SDE), which is an integral cash flow stream for small businesses. Once SDE is calculated, the next step is to determine a reasonable multiple (or range of multiples) to apply to the SDE earnings […]
Seller’s Discretionary Earnings (SDE) is an integral cash flow stream for small businesses. SDE encompasses all cash flows paid to a single owner-operator, including an adjustment for owner’s salary, discretionary expenses and nonrecurring income/expenses. Below is a step-by-step explanation of how to calculate SDE for a typical small business. An extract of the first […]
A Special Purpose Property is defined in the SBA Standard Operating Procedure (SOP) 50 10 5(I) as “a limited market property with a unique physical design, special construction materials, or a layout that restricts its utility to the specific use for which it was built.” The most popular examples of Special Purpose Properties that SBA lenders finance include hotels, […]
The price to revenue multiple (also referred to as the revenue multiple or sales multiple) is often used by small business professionals to estimate the value of a business, because of its simplicity. It’s a ratio calculated by dividing the value (price) of a company by its annual revenue. Certain businesses such as accounting firms […]
Prior to obtaining a business appraisal for a change of ownership loan, one of the most important processes for an SBA lender is structuring their use of proceeds and determining the borrower’s equity injection requirement. As per the SBA’s Standard Operating Procedures (SOP), “If the purchase price of the business includes intangible assets in […]
As stated in the SBA Standard Operating Procedures (SOP), if the purchase price of a business includes intangible assets in excess of $500,000, the borrower (or seller, in the form a two year seller standby note) must contribute at least 25% of the purchase price of the business for the application to be processed under […]
The SBA has released an updated version of its Standard Operating Procedures (SOP) 50 10 5(H), which is effective May 1, 2015. The following discussion highlights key revisions in the SOP which affect both business appraisals and real estate appraisals, along with the author’s comments. Terminology Throughout the SOP, the term “business valuation” […]
Rules of thumb can be useful to determine if a proposed business transaction seems reasonable prior to accepting an SBA loan application. However, most businesses are unique, and applying a rule of thumb without additional analysis can be dangerous. Using a rule of thumb approach is a simplified form of the market approach, in […]
Business valuations compiled for SBA purposes are complex, often containing over 80 pages of financials, projections and analysis. Unfortunately, many readers are tempted to skim the summary page for the conclusion of value, and close the file. This can be a costly mistake. SBA loan officers and underwriters should familiarize themselves with the essential sections […]
