Business Valuations for Acquisition Loans Explained

Business Valuations for Change-of-Ownership Loans Explained

Securing financing for acquisitions, partner buyouts, or ownership transitions often depends on a critical piece of the puzzle: a solid business valuation. Think of it as a financial snapshot of the company’s value, based on its assets, operations, and growth potential. It’s not just a formality; it’s the foundation for a smooth transaction.

Under the SBA’s updated SOP 50 10 8 rules, effective June 1, 2025, business valuations are central to fair deals and lender protections, particularly for 7(a) loans. Traditional lenders follow similar principles but with more room for flexibility. Below, we’ll break down how business valuations work, why they matter, and how they shape your financing options.

Why Business Valuations Are Essential for Ownership Loans

Business valuations ensure a fair market value is determined for the company being bought or transitioned. They focus on cash flow, intangible assets like goodwill, and tangible assets like equipment. Real estate is evaluated separately through appraisals when applicable. Here’s why valuations are vital:

• Fair Pricing: Ensures the agreed-upon purchase price aligns with the company’s true value.

• Loan Alignment: Determines the maximum financing allowed to minimize risk for lenders.

• Compliance: Independent valuations are mandatory for SBA loans over specific amounts to maintain objectivity and transparency.

For conventional loans, requirements can vary. Large loans may require a new valuation, but smaller ones might rely on existing assessments from trusted sources.

When Are Business Valuations Required?

Specific rules apply based on the type and size of the loan:

• SBA 7(a) Loans

• Independent valuations are mandatory if the loan amount (excluding real estate or equipment) exceeds $250,000 or involves a close buyer-seller relationship, such as family or associates.

  1. For loans below this threshold, an internal valuation by the lender may suffice.

  2. Special-purpose businesses (e.g., hotels or gas stations) may require a “going concern” appraisal, which attributes value to both tangible and intangible components.

• Conventional Loans

• Typically required for loans over $500,000, though requirements vary by lender. Smaller loans may omit valuations or use simplified assessments.

The SBA emphasizes strict guidelines for independence. Valuations must be conducted specifically for the lender and cannot be repurposed from the buyer or seller. Additionally, they must comply with Uniform Standards of Professional Appraisal Practice (USPAP).

How Valuations Directly Affect Your Loan

Business valuations impact several aspects of the financing process, including:

• Loan Amount Cap

The SBA limits loan amounts for ownership changes to the business’s appraised value. For instance, if a company is valued at $800,000 but the agreed price is $900,000, you’ll need to cover the $100,000 difference through cash, a seller note, or a price renegotiation.

• Equity Injection

For ownership transitions, you’re expected to inject at least 10% of total project costs (e.g., $100,000 for a $1 million deal). Seller financing can’t count as equity unless on full standby for the loan term.

• Collateral Requirements

Loans focus on business assets like inventory, equipment, and intangibles. If these don’t cover the loan, personal assets may be required. However, SBA Express loans are more forgiving for smaller amounts.

If a valuation comes in lower than expected, the deal isn’t necessarily dead. Negotiations or seller-financed short-term notes can make up the gap without compromising cash flow.

Common Questions About Business Valuations for Loans

• Do lenders always require valuations for acquisitions? Yes, almost always. SBA loans mandate them for purchases exceeding $250,000, while conventional lenders typically require them for loans over $500,000.

• When is the valuation ordered? For SBA loans, lenders must order a valuation from approved vendors, specific to the transaction. Conventional lenders might accept existing ones (if recent and reliable).

• Which comes first, pre-qualification or valuation? Pre-qualification. You’ll want to confirm your financing eligibility with an estimated price before committing to a purchase.

• What happens if the valuation is lower than the purchase price? Loan proceeds cannot exceed the business valuation under SBA rules. Any gap must be resolved with cash, seller financing, or renegotiation.

• Do lenders order valuations on buyers’ businesses? Rarely. SBA loans no longer require this. For conventional loans, it’s only common for deals exceeding $5–10 million.

• Who pays for the valuation? Typically, borrowers cover the cost, ranging from $1,200 to $2,500, depending on the business’s complexity. Sellers occasionally pay to streamline the process for buyers.

• How long is a valuation valid? Most lenders consider valuations valid for up to six months, though they prefer the most up-to-date assessments possible.

Think Inside the LoanBox

Navigating business valuations and loan approvals doesn’t have to be overwhelming. At LoanBox, we specialize in simplifying small business financing. Using AI and proprietary analytics, we match borrowers with the right lenders, ensuring faster approvals and fewer missteps.

• Enjoy the ease of online lending with human support when you need it.

• Leverage the expertise of LoanBox Advisors to guide you through the toughest scenarios.

• Gain confidence from partnering with trusted banks and proven systems.

Skip the confusion. Minimize risk. Maximize clarity. Think inside the LoanBox.