In business acquisitions, “price” and “value” are often conflated, creating confusion among stakeholders. For SBA 7(a) lending, distinguishing fair market value (FMV) from the negotiated transaction price is critical to ensure compliant financing and informed decisions. This white paper explores the differences, their causes, and their implications for objective SBA 7(a) valuations.

Defining the Terms

Value

Value is an economic estimate based on a standard, typically fair market value (FMV) for small businesses, defined as:

The amount at which the property would change hands between a willing buyer and willing seller, when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. (IRS Revenue Ruling 59-60).

Attributes:

• Assumes a hypothetical buyer and seller.
• Reflects an open, unrestricted market.
• Excludes buyer-specific synergies or compulsion.

Price

Price is the actual amount paid in a specific transaction.

Attributes:

• Reflects real negotiations, emotions, or strategic goals.
• May include buyer-specific synergies, urgency, or concessions.
• Influenced by market conditions or financing terms.
• May diverge from FMV.

Common Causes of Divergence Between Price and Value

Synergistic Premiums: Strategic buyers may pay above FMV for synergies, like cost savings or market advantages.
Example: A buyer acquiring a competitor for $300,000 annual cost savings may pay a premium unavailable to a non-strategic buyer.

Non-Financial Motivations: Buyers may pay premiums for personal reasons (e.g., legacy, passion, relocation), unrelated to FMV.

Financing Terms and Deal Structure: Price reflects financing availability, deal structure (asset vs. stock), or seller concessions (e.g., earnouts, financing), which FMV excludes.

Limited Market Exposure: Without broad marketing or multiple bidders, price may reflect negotiated pressure, not FMV. SBA 7(a) lenders often require independent valuations to ensure price aligns with FMV.

Why This Distinction Matters

For Lenders

• Ensures SOP compliance, reducing loan loss risk.
• Guides borrower counseling on deal structuring.

For Buyers

• Supports informed decisions, separating emotional from financial value.
• Highlights premiums paid for non-FMV factors.

For Sellers

• Aligns expectations, especially for strategic sales.
• Reduces due diligence friction when price exceeds FMV.

Conclusion

Value is an objective, theoretical estimate; price is a real, often emotional outcome. For SBA 7(a) lending, FMV, derived via methods like capitalization of earnings, guides valuations, while price reflects negotiations. Understanding the price-value gap ensures compliant, informed SBA 7(a) transactions.