Lender ordered target valuation. Is it accurate? Implications? - Searchfunder

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by a searcher from Northwestern University - Kellogg School of Management
in Newtown, PA 18940, USA

1yr ago

Lender ordered target valuation. Is it accurate? Implications?

Curious if the lender ordered valuation of the target has any meaningful implications for me?
#1 Is it accurate outside of the true definition of something is only worth what someone is willing to pay?
#2 Other than loan approval, is there anything that is meaningful for the transition or the operation of the business in the future near term or long term?

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reply by a professional 1yr ago
from University of Virginia in Holmes, NY 12531, USA

Howdy - so, first, broadly, valuation's a craft, not a science, and what a given assessment shows is absolutely going to be informed by (a) methodology, (b) standard of value, (c) the conscious/unconscious biases/preferences of the party paying for mandating the valuation. Here, the lender's valuation will, of course, have the most impact on what the lender is willing to loan. Secondarily, though along the same lines and toward the same end, if the lender's valuation has the target valued significantly lower than the anticipated purchase price, that may cause issues, although it can cut both ways (if the seller hasn't had the firm professionally valued, a bank valuation that comes in low *may* ultimately contribute to a lower purchase price). All else equal, expect a lender backed-valuation to run conservative and to lean heavily, if not exclusively, on historic free cash flow, as opposed to projections. As to your second question, I'd say basically "no" - not directly - but of course if it impacts the loan terms and/or the purchase price, those may surely impact the transition of the operation. Happy to chat further if helpful. Good luck and best, Matt

reply by a lender 1yr ago
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

^redacted‌ pretty much hit the nail on the end. Depending on the type of debt you are using, the valuation can certainly have some impact. If you are using an SBA 7A loan, then the loan amount cannot exceed the business valuation. So even if the valuation comes in low, so long as the debt does not exceed the valuation amount, you can still close the loan.

I would say generally speaking we see business valuations come in pretty close to the purchase price. The times they do not is typically when a company is seeing very quick growth or when everyone already knows the multiple is high. You can certainly try to use a low valuation to renegotiate a deal, but I have not historically seen that to be successful. Most seller and selling brokers identify the Bank's valuation could be conservative.

Happy to discuss valuations in more detail at any time at redacted Good luck.

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