Published: November, 2018

Whether you are purchasing a small business, or you are purchasing a building for your small business, SBA government-guaranteed financing can almost always provide a lower down payment, longer repayment terms, and easier qualifying criteria than a conventional bank loan. In fact, an SBA lender’s “claim to fame” is its ability to approve down payments as low as 10%, or generally half what is required with conventional bank financing! In accordance with federal guidelines and good business loan underwriting criteria, the SBA lender will order a third party, professional, business or commercial real estate appraisal to confirm a value at least equal to the negotiated purchase price of the business or the real estate being acquired with SBA financing.

While most buyers have negotiated a contract and purchase price before they apply for SBA financing, some buyers take advantage of this requirement to order the appraisal before the contract price is negotiated. Knowing the appraised value, which the SBA lender must rely upon, can be very helpful to the buyer in determining the purchase price he is willing to pay for the business or small business real estate he plans to acquire with SBA financing. Because an SBA lender cannot rely upon an appraisal ordered by the borrower, by the seller, or by anybody other than the lender, the SBA borrower must pay his SBA lender to formally engage the appraiser on his behalf. The SBA loan applicant can pay the cost of the appraisal to the SBA lender, and the SBA lender can order an independent professional business or real estate appraisal from a properly accredited appraiser, in accordance with federal guidelines and banking regulations. Both parties, the buyer and the lender, may then reasonably rely upon the appraised value for contract negotiation and for loan approval.

If a small business or small business real estate appraisal is ordered by the lender after a purchase contract is negotiated, and after the SBA lender has approved the loan, loan approval will be conditioned for an appraisal amount of at least the purchase price. Often, having used the guidance of a professional business broker or commercial real estate broker, the buyer will not have a problem with this sequence. Hopefully the broker helped him negotiate a purchase price less than the market value! If, however, the appraisal results in a market value less than the purchase price, the purchase contract, or the loan approval terms, must be renegotiated. While this provides protection for the buyer and the lender, it can consume additional time and additional risk that the contract may not be successfully renegotiated.

In summary, when using SBA government-guaranteed financing for a small business acquisition, or for a small business real estate purchase, the professional business or business real estate appraisal can be a useful tool. The buyer will be required to have an appraisal, the lender must order their own appraisal, and there are options for when the appraisal can be ordered by the lender. Some buyers will opt to spend the money only after successful contract negotiations, and some will opt to purchase the appraisal for a tool in their negotiations.