Business valuation is both an art and a science. While it relies on empirical data, financial models, and accepted methodologies, the final conclusion often involves professional judgment and assumptions. This gives rise to the concept of valuation as a range, a notion widely accepted in academic literature, professional standards, and practical appraisal work. However, when valuing a business for Small Business Administration (SBA) 7(a) lending purposes—particularly in change-of-ownership scenarios—the appraiser must assign a single fair market value. This paper explores the tension between the theoretical framework of valuation ranges and the practical requirement of a point estimate, and examines how various assumptions and methodologies contribute to the inherent subjectivity of business value.

1. The Theoretical Foundation of Valuation Ranges

Most valuation authorities recognize that business value exists within a reasonable range rather than as a singular, precise number:

The International Valuation Standards Council (IVSC) emphasizes that judgment in valuation must be applied objectively, and different approaches may result in divergent indications requiring reconciliation.

The American Society of Appraisers (ASA) and other professional bodies similarly acknowledge that varying assumptions, inputs, and judgments can reasonably lead to different conclusions (e.g., appraisers must use informed judgment in weighting methods).

This variability stems from several factors:

• Differences in risk perception
• Varying interpretations of historical performance
• Discrepancies in future expectations
• Market-based evidence with wide transaction ranges

In summary, there is often no “true” value—only a defendable opinion within a justifiable range.

2. Why the SBA Requires a Single Value

Despite this inherent variability, the SBA Standard Operating Procedure (SOP) 50 10 8 requires that business valuations deliver a concluded opinion of value expressed as a single point fair market value. This requirement facilitates underwriting clarity and aligns with SBA’s need to determine whether the loan amount is fully supported by the underlying business (e.g., capping proceeds at the valuation in ownership changes).

For compliance, the appraiser is expected to apply professional judgment to reconcile the value indications from various methods and arrive at one number. However, recognize that this number represents the most reasonable estimate within a broader range of potential outcomes.

3. Sources of Valuation Variability

Let’s examine why different methods, inputs, or assumptions might lead to varying conclusions of value (summarized in the table below):

Factor	Description	Impact on Value
A. Different Valuation Approaches	Income: Sensitive to discount rates, growth, normalization. Market: Dependent on comps, multiples, adjustments. Asset: Often understates for operating businesses.	Divergent indications due to philosophies/inputs.
B. Normalization and Discretionary Adjustments	Owner compensation, non-recurring expenses, related-party rent rely on judgment.	Small changes materially impact small businesses.
C. Assumptions About the Future	DCF/capitalization sensitive to revenue growth, costs, capex, long-term rates.	Differing assumptions shift value significantly.
D. Risk and Discount Rate Selection	Incorporates industry/size/company-specific risks, market conditions.	Slight changes produce noticeable output shifts.

Even when applied correctly, these factors may generate divergent value indications due to underlying differences.

4. Case Study: Same Business, Different Values

Consider a business with $500,000 in normalized free cash flow (scenarios below):

Scenario	Method/Assumption	Value
1: Appraiser A	20% capitalization rate	$2.5 million
2: Appraiser B	18% (lower risk)	$2.78 million
3: Appraiser C	Market comps (median multiples)	$2.3 million

Each conclusion is well supported, but the spread is $2.3M to $2.78M—a 20% difference. The reconciliation process must weigh these findings and converge on a supportable midpoint.

4b. Case Study: One Appraiser, Different Assumptions

To illustrate how a single appraiser can arrive at a range of values, consider a business with $500,000 in normalized free cash flow, valued using the income approach (capitalization of earnings method). The appraiser tests different assumptions for capital expenditures (capex), capitalization rate, and long-term growth rate, producing the following scenarios:

Scenario	Capex	Discount Rate	Growth Rate	Value
Base Case	$50,000	20%	3%	$2.65M
Optimistic	$30,000	18%	4%	$3.36M
Conservative	$70,000	22%	2%	$2.15M

Calculations:

• Base Case: Free cash flow adjusted for $50,000 capex = $450,000. Discount rate (20%) minus growth (3%) = 17% adjusted cap rate. Value = $450,000 / 0.17 ≈ $2.65M.
• Optimistic: Free cash flow adjusted for $30,000 capex = $470,000. Discount rate (18%) minus growth (4%) = 14% adjusted cap rate. Value = $470,000 / 0.14 ≈ $3.36M.
• Conservative: Free cash flow adjusted for $70,000 capex = $430,000. Discount rate (22%) minus growth (2%) = 20% adjusted cap rate. Value = $430,000 / 0.20 ≈ $2.15M.

The resulting range spans $2.15M to $3.36M—driven by reasonable variations in assumptions. The appraiser reconciles these by selecting the base case as most representative, considering industry norms and company-specific factors, but acknowledges the range reflects inherent uncertainty.

5. Professional Judgment and the Reconciliation Process

Most valuation standards, including those from National Association of Certified Valuators and Analysts (NACVA), American Institute of Certified Public Accountants (AICPA), and ASA, require the appraiser to reconcile the value indications. This judgment is influenced by:

• The quality and quantity of available data
• The appropriateness of each method for the subject company
• The reliability of inputs and assumptions

The reconciliation doesn’t imply that the other indications are “wrong”—only that one appears most indicative based on professional judgment.

6. Practical Implications for SBA Lenders and Borrowers

Lenders should understand that:

• The concluded value is a point estimate representing the midpoint of a reasoned range.
• Small variances in inputs can cause significant swings in value.
• Valuation is not a mechanical process; it’s interpretive and assumption-driven.

Borrowers may incorrectly believe the valuation is an absolute truth. Educating stakeholders that it is an informed estimate within a possible range can reduce disputes and help align expectations.

Conclusion

While the SBA requires a single concluded value for compliance and underwriting purposes, the reality of business valuation is more nuanced. Every valuation rests upon assumptions, professional judgment, and the selection of methods—any of which can shift the result within a reasonable range. Recognizing this helps lenders, borrowers, and appraisers approach valuation with appropriate expectations, mitigate conflict, and ensure better understanding of the business’s worth.

The single value required by the SBA should be viewed as a defensible midpoint, not a definitive truth.