Business appraisal question

October 20, 2023

by a searcher in Boston, MA, USA

Short version: how often does a bank's appraisal come in lower than a buyer hoped for, limiting the amount of debt avaiable to them?

Longer version: I am close to submitting an LOI for a service business. The business has ~$1M EBITDA, with a list price of 5x. The broker has indicated that they expect to sell at full asking price. I believe the price is justified because the business has been growing at ~20% per year for multiple years with a steady margin, is well regarded in their market, and has a good management team in place. I also believe they have multiple near-term opportunities to accelerate growth, which I would be well suited to execute as the operator.

However, my concern is that, as I understand it, all banks will require a business appraisal, and will lend as a percentage of the lower of the sale price or the appraised price. If the appraiser says "businesses of this size in this industry typically sell at 4x, so I'm valuing this business at $4M", it would significantly reduce the available loan size and make the deal a lot harder to execute.

Is this a common occurrence? Any way to mitigate this risk? Will some banks/appraisers put more weight on the business's growth trajectory and my business plan than others?

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I would also assume you are looking at an SBA loan. Nicholas is right, the Bank can lend you up to the appraised value of the business, so even if the value comes in a little light, so long as it does not come in for less than the loan amount you should be good. I would say that I rarely see businesses appraise for less than list price unless the multiple is completely out of wack. Most appraisers are going to focus their conclusions on the most recent periods, namely the last fiscal year, YTD, and TTM. Plus the best example of market value is always what someone is willing to sell and what someone is willing to buy a business for. They will also weight in consistent growth year over year. It sounds like you should be fine on your purchase. Good luck and I hope it works out. If you have additional questions you can reach me here or directly at redacted

Reply by an intermediary
from Clemson University in Raleigh, NC, USA

I've been valuing and selling businesses as a broker for just over 20 years, and this has never happened to one of my buyers. That might be because my valuations are solid (I'm the credentialing chairman for the Certified Business Intermediary designation since 2017 and past International Business Brokers Association chairperson in###-###-#### or it might be because the SBA and commercial lenders are more flexible than we might expect. That being said, in this macro-economic and interest rate environment with rising debt service ratios I am seeing a ceiling on transaction values more frequently.

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