We're looking at buying a commercial kitchen equipment supplier, and our bank asked for a "valuation." I told them the asking price is what the market will bear, but they didn't seem satisfied. Do I actually need an accountant to produce a formal valuation document, or can a simple appraisal or even just the seller's numbers work? Trying to avoid paying thousands for something the bank might ignore anyway.
Business Loans
Are formal business valuations mandatory for getting a loan?
Depends on the loan size and whether it's SBA-backed. Under a lot of SBA programs you need a business appraisal from a qualified source if the loan is above a certain threshold. The seller's own numbers alone usually won't cut it because they're not independent.
Not always mandatory. We did a conventional loan last year and the bank accepted a valuation I pulled together with my CPA - basically three years of financials plus comparable sales. It wasn't a full formal report And it cost about $1,200.
Who asked for it - the loan officer or the underwriter? In my experience the loan officer says "valuation" loosely and then underwriting wants something more formal. Worth asking exactly what format they'll accept befor you pay for the Cadillac version.
The bank has no incentive to accept your numbers. They want an independent third party. That's just how it works.
I went the cheap route and tried to use a broker's opinion of value. Bank rejected it, said it wasn't from an accredited appraiser. Ended up paying $4,500 for a proper report and the loan closed two weeks later. Should have done it first.
This varies wildly by lender. Community banks and credit unions will often take a lighter-touch valuation. Big national banks seem to want the full formal appraisal. If the deal is small enough, some lenders just use the equipment and inventory as collateral and skip the going-concern valuation entirely.
What kind of loan structure are you looking at? If they're taking real estate as collateral the valuation question changes. If it's purely cash flow lending then yes, they want to see a formal valuation of what the cash flow is actually worth.
Copperkettle, has the seller had a valuation done recently? Sometimes the seller has one from when they bought it or from an estate planning exercise. You could ask for a copy and see if the bank will accept a letter of reliance on it. Saves you the full cost.
no. but the bank can require it as a condition of the loan, so practically yes if you want that loan.
The dirty secret is that a lot of these valuations come in right around contract price anyway because appraisers anchor to the deal. The bank knows this. So the real function isn't discovery, it's documentation and liability shifting. That's why they insist on it from someone accredited - so if things go bad they can point to the report.
Following this. We're in a similar spot with a landscape supply company and I genuinely can't tell if the loan officer is giving me a real requirement or just covering himself. I'll be asking him to put the exact valuation standard in writing.
Get it in writing. Verbal "you'll need a valuation" turned into three different versions of what that meant by the time we got to closing. Cost us a month.
The formal report also protects you with the seller. If the seller's asking price is out of line, an independent valuation gives you a documented basis to negotiate. In that sense it can pay for itself.
The seller did have one done maybe eighteeN months ago for a buyout with a former partner. I hadn't thought to ask for it. Im going to request that first and see what the bank says about a reliance letter before committing to a fresh appraisal. The loan is a conventional term loan, not SBA, for what it's worth.
If it's an older report the bank may still want a fresh one, especially if the numbers are more than a year old. But worth a shot. Reliance letters are a real thing and some appraisers will issue one to the bank for a fee much smaller than a new report.