In SBA 7(a) loan underwriting, business valuations play a pivotal role in determining loan eligibility and appropriate risk mitigation. While projections and annualized financials can offer a forward-looking view of performance, they come with significant pitfalls—particularly when used as a basis for valuation without adequate historical context. The SBA’s Standard Operating Procedure explicitly requires lenders … Continue reading The Risks of Relying on Annualized Financials and Projections in SBA 7(a) Business Valuations

Business valuations for SBA 7(a) and 504 loans, federally insured lending, and regulatory contexts must navigate the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), Uniform Standards of Professional Appraisal Practice (USPAP), and SBA SOP 50 10 8 (effective June 1, 2025). FIRREA governs real estate appraisals in business transactions, USPAP provides ethical and performance … Continue reading Business Valuations Under FIRREA, USPAP, and SBA SOP 50 10 8

Normalization adjustments are essential in business valuations for SBA 7(a) loans, aligning historical financial performance with a hypothetical buyer’s expectations under the fair market value (FMV) standard. FMV, per IRS Revenue Ruling 59-60, is the price at which a property changes hands between a willing buyer and seller, neither under compulsion, with reasonable knowledge of … Continue reading Normalization Adjustments (Addbacks) in Business Valuations for SBA 7(a) Loans: Emphasis on Owner Compensation and Free Cash Flow

In valuing closely held businesses for SBA 7(a) financing, determining an appropriate cost of equity is a critical step in the income approach. This white paper explores the application of the build-up method using current Kroll data, historical returns by asset class, and empirical investor return expectations. Additionally, it addresses practical challenges and offers recommendations … Continue reading Estimating the Cost of Equity Capital for Private Company Valuation

In business valuations—especially those conducted for SBA 7(a) loan purposes or during transactions—confusion often arises when changes in capital structure affect the valuation results. This confusion intensifies when a deal shifts from an asset purchase to a stock purchase. Bankers and clients may ask, “Why does the value change if the business hasn’t changed?” To … Continue reading Understanding Capital Structure’s Impact on Business Valuation: A Guide for Bankers

In business valuation, the income approach, particularly the discounted cash flow (DCF) method, often employs a two-stage model: a discrete forecast period and a terminal value assuming perpetual growth. The long-term growth rate (TGR) or terminal growth rate projects free cash flows (FCF) beyond the forecast period. While seemingly minor, TGR significantly impacts valuation. Unrealistically … Continue reading Understanding the Long-Term Growth Rate in Business Valuation – Limits, Logic, and Economic Reality

Business valuation is a cornerstone of financial decision-making, particularly in transactions involving mergers, acquisitions, or financing, such as Small Business Administration (SBA) 7(a) loans for business acquisitions. Accurate financial information is the foundation of a credible valuation, ensuring that stakeholders—lenders, buyers, sellers, and appraisers—can make informed decisions. In scenarios where a division of a business … Continue reading The Critical Role of Accurate Financial Information in Business Valuation

Acquiring a business can be structured as an asset sale or a stock sale (or membership interest sale for LLCs). Both structures achieve ownership transfer but differ in legal mechanics, tax consequences, and valuation considerations. This white paper outlines these distinctions, details common inclusions and exclusions, and explains their treatment in business valuations, particularly for … Continue reading Asset Sale vs. Stock Sale: Legal, Tax, and Valuation Considerations in Small Business Acquisitions

Accurate estimation of a company’s cash-generating ability is critical for SBA 7(a) business valuations. While EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) serves as a proxy for operating performance, it does not represent Free Cash Flow (FCF). Misinterpreting EBITDA as FCF can inflate valuations and misguide lending decisions. This white paper examines the differences … Continue reading EBITDA vs. Free Cash Flow: Why the Distinction Matters in SBA 7(a) Business Valuations