The Bottom Line?
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.
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.
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:
- Hiring Qualified Appraisers with SBA Experience
- Type of Report and Related Fees
- Appropriate Scope of Work Determination and Description
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.
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
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.
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.
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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