In business valuations for SBA 7(a) lending, the premise of value plays a pivotal role in determining how a company is assessed. The two primary premises of value are the going concern and liquidation premises. This white paper explores the conceptual differences between these premises, their implications on valuation methodology, and their application in SBA loan underwriting.

Going Concern vs. Liquidation: Definitions and Conceptual Differences

A going concern premise assumes that the business will continue operating in the foreseeable future. This assumption includes continuity of operations, customer and supplier relationships, and a return on investments over time. Most SBA 7(a) loans for business acquisitions presume a going concern unless there are clear indicators to the contrary.

In contrast, a liquidation premise assumes that the business will cease operations and that its assets will be sold off, either in an orderly or forced manner. This scenario is relevant in cases of business distress, insolvency, or strategic asset divestment. Liquidation may be voluntary (orderly) or involuntary (forced), each yielding different recovery values.

Impact on Valuation Approaches and Methodologies

The chosen premise of value influences not only the value conclusion but also the valuation approach and methodologies used. For SBA 7(a) loans, the valuation must reflect fair market value using a recognized approach suitable to the circumstances of the business and the premise selected.

Premise of Value	Common Approaches Used
Going Concern	Income Approach (Capitalization of Cash Flow, DCF), Market Approach (Guideline Transactions)
Liquidation	Asset Approach (Adjusted Book Value), Orderly or Forced Liquidation Analysis

A going concern valuation typically emphasizes the business’s ability to generate future cash flows. This makes income-based methods such as the capitalization of free cash flow or discounted cash flow (DCF) the preferred choice. Market-based methods may also be relevant when comparable transactions are available.

A liquidation valuation, however, places greater weight on the value of tangible assets. The adjusted book value method, with fair market value adjustments to assets and liabilities, becomes more relevant. In some cases, a professional appraisal of machinery, real estate, or inventory may be required.

Case Example: Asset Value Exceeds Income Value

Consider a manufacturing company with aging ownership and declining revenues due to loss of key customers. An income approach using the capitalization of free cash flow yields a value of $500,000. However, an asset-based analysis reveals machinery and inventory with a net realizable value of $850,000.

In this scenario, the analyst must perform a decision analysis:

1. Assess Continuity: Are there buyers capable of sustaining operations post-acquisition? Is there a realistic transition plan?
2. Evaluate SBA Guidelines: Does the buyer intend to operate the business or liquidate it? SBA 7(a) loans are not intended to finance asset speculation.
3. Determine Marketability: Can the buyer realize the asset value without operational risk? Will liquidation actually produce the $850,000 value?

If the evidence supports ongoing operations with a qualified buyer and realistic future cash flows, the going concern premise should be used despite the lower income-based value. If, however, there is no market for continued operations, the liquidation premise may be appropriate. In such cases, SBA may require additional collateral or underwriting scrutiny.

Intangible Value in Distressed or Liquidation Scenarios

In businesses lacking free cash flow—or operating at a loss—the income approach often results in minimal or no supportable value. Nevertheless, certain separately identifiable intangible assets may still hold value, particularly when they are legally transferable and have observable market demand.

Examples of such assets include:

• FDA product registrations
• Customer contracts with assignability
• Proprietary software
• Trademarks and trade names
• Regulatory permits (e.g., liquor licenses)

While these assets may be valuable to strategic buyers (such as competitors or consolidators), they typically do not have fair market value to a hypothetical buyer under the SBA’s definition—especially when the company cannot generate positive free cash flow. Goodwill, in particular, is presumed to be tied to ongoing operations and thus loses all value under a liquidation premise.

For example, a health supplement company may hold FDA approvals, private-label formulas, and a trademarked brand but be operating at a loss. If a competitor is interested in acquiring the brand and product line, those intangibles may have real strategic value—but for SBA 7(a) lending purposes, unless a market of hypothetical buyers exists that would pay for those assets regardless of ongoing operations, their fair market value is likely negligible.

Therefore, while it is possible for separately identifiable intangible assets to retain value in a distressed context, their valuation must be grounded in objective market evidence, not strategic synergy. Additionally, franchise fees, brand value, or proprietary methods are generally not supportable under the fair market value standard if the business lacks the ability to operate profitably.

One-Page Decision Tree: Intangible Assets and FMV When There Is No Free Cash Flow

Step 1: Is the business generating positive free cash flow?

• Yes → Consider intangible value under a going concern premise.
• No → Proceed to Step 2.

Step 2: Are the intangible assets legally transferable and separately identifiable?

• No → Intangible assets have no fair market value.
• Yes → Proceed to Step 3.

Step 3: Is there evidence of an active market for the asset (outside of a specific strategic buyer)?

• No → Intangible assets have no supportable fair market value.
• Yes → Proceed to Step 4.

Step 4: Can the asset be monetized independently of ongoing operations?

• Yes → Consider using market-based licensing comps, salvage value, or relief-from-royalty analysis (with documentation).
• No → Do not include intangible value unless supported by compelling market data.

Important Notes for SBA Lenders:

• Intangible assets must have real market value, not strategic value.
• Franchises, goodwill, and brand fees have no FMV in liquidation unless separable and transferable.
• Always align with SOP 50 10 8 and the IRS Revenue Ruling 59-60 FMV definition.

Practical Challenges in Selecting and Applying the Premise of Value

Valuation professionals and SBA lenders face several challenges when determining the appropriate premise of value:

• Ambiguity in Business Viability: Assessing whether a business can realistically continue as a going concern requires judgment, especially when financials show declining revenues or losses.
• Data Limitations: Reliable market data for liquidation values, particularly for intangible assets, is often scarce, complicating fair market value estimates.
• Buyer Intent Misalignment: A buyer’s intention to liquidate assets may conflict with SBA 7(a) requirements, which prioritize ongoing operations.

Recommendations for Valuation Professionals and Lenders

To address these challenges and ensure robust valuations, consider the following:

• Document Continuity Evidence: Clearly articulate the rationale for choosing the going concern premise, including buyer qualifications, transition plans, or market demand for the business’s operations.
• Source Reliable Asset Data: Engage professional appraisers for tangible assets (e.g., machinery & equipment) and use market-based comparables for intangibles to support liquidation values.
• Align with SBA Intent: Ensure the valuation premise reflects the buyer’s operational intent and SBA’s focus on financing viable businesses, avoiding asset speculation.
• Provide Transparent Analysis: Include a decision tree or narrative in the valuation report to justify the selected premise and address potential SBA or regulatory questions.

Practical Implications for SBA Lenders

• Default to Going Concern: SBA SOP guidance expects valuations to reflect a going concern unless there is overwhelming evidence that the business will cease operations.
• Asset Approach as Secondary: When income or market methods yield unreliable or low values, the asset approach may provide a useful floor for comparison.
• Premise Disclosure: Valuation reports should clearly state the selected premise of value.
• Support for Loan Decisions: Lenders must ensure the valuation premise aligns with the transaction type, business condition, and buyer intent.
• Scrutiny of Intangibles: Separately identifiable intangibles should only be given value if transferable and marketable to a hypothetical buyer—not just a specific acquirer.

Conclusion

The premise of value—whether going concern or liquidation—profoundly impacts how business value is measured in SBA 7(a) lending. While most valuations should assume a going concern, exceptions exist when asset values outweigh income potential or when ongoing operations are no longer viable. Analysts and lenders must exercise sound judgment, support their assumptions with evidence, and ensure alignment with SBA SOP requirements.

Additionally, while some intangible assets may appear valuable, their contribution to value under the fair market standard is limited in the absence of cash flow or ongoing operations. Intangible value should be critically assessed and only recognized when tied to transferable, legally identifiable assets that could be sold to a willing buyer under no compulsion. By addressing practical challenges and following clear guidelines, valuation professionals and lenders can produce defensible valuations that support sound SBA 7(a) lending decisions.