Lender documents for a business acquisition loan, and why a valuation calculator is not one

A calculator estimates value. A lender underwrites repayment, records and collateral, and it does not accept a calculator's output as underwriting evidence. The documents and tests below are what a lender asks for, and a calculator figure satisfies none of them.

A buyer wants one thing, a lender another, and a formal valuation follows rules set by whoever will rely on it. Knowing each requirement tells you what to have ready, and why a tool's output cannot stand in for any of them.

What to take away

What a lender requires first

A lender starts with the deal itself. It needs the executed purchase agreement, or the letter of intent if the agreement is not yet signed, because the loan funds a specific price on specific terms. Without those terms, there is nothing to underwrite.

Next come the financial records. A lender may request business and owner tax returns, interim financial statements, bank statements, a business debt schedule, and aged accounts receivable and payable. Lenders also look for a business plan with projected financials that show how the buyer will run the company.

None of that is a valuation. It is the evidence from which a valuation can be argued, and a seller who has it ready is negotiating from a different position than one who does not. Assembling it is the substance of the preparation year.

The forms and the coverage test

For SBA 7(a) loans, lender checklists describe Form 1919, the borrower information form, as completed by owners of 20 percent or more, officers, directors and key managers. Form 413, the personal financial statement, must be current within 90 days of closing, according to the same checklists.

IRS Form 4506-C, the IVES request for transcripts of tax returns, is signed by the business and, in an acquisition, by the seller as well. It lets the lender verify tax information directly with the IRS.

The lender then tests coverage. The debt service coverage ratio (DSCR) compares cash flow available for debt service with the required principal and interest payments. Most acquisition lenders look for at least 1.25x. Lenders often add back non-cash items such as depreciation and amortization before they apply the test.

For the SBA equity injection, the rule sits in SBA's Standard Operating Procedure 50 10. Lender guides commonly cite a 10 percent minimum of total project cost, but the figure depends on the deal and the current SOP, so confirm it with the lender in writing before you commit funds.

Appraisals and collateral

A lender may order its own third-party reports. These can include a business valuation, a real estate appraisal where property is collateral, an equipment appraisal, and an environmental Phase I assessment for real estate. Each report is ordered for the lender's own credit decision.

Depending on the deal, the lender may require a personal guarantee and collateral. Loan covenants may set minimum coverage, limit additional debt or distributions, and require periodic financial reporting. A missed payment or covenant breach may trigger default under the loan documents. The acquisition financing article sets out the tests they apply.

What a formal valuation requires

When a figure is needed for tax, an estate, a partnership dispute or a divorce, the requirements stop being a matter of preference.

Such a valuation is prepared under a defined basis of value, as at a stated date, for a stated purpose, by a person qualified to sign it and answerable for it. In the United States, the Uniform Standards of Professional Appraisal Practice (USPAP) set the rules for developing and reporting an appraisal. USPAP does not prescribe a specific valuation method.

Your accountant will say which basis governs your situation, and a lawyer where proceedings are involved. What the professional brings is standing: the figure can be relied on, and someone carries professional liability insurance behind it. No calculator meets this requirement.

The one requirement common to all of them

Records that reconcile. Management accounts, tax filings and bank activity should agree with each other, with every difference explained in advance. In the United States, IRS Publication 583, Starting a Business and Keeping Records, explains federal tax recordkeeping for businesses.

Where records do not reconcile, no method and no tool helps. A buyer's diligence will find the gap, a lender will decline to lend against the part it cannot verify, and an appraiser will qualify the report.

What a calculator output is good for

Orientation, for ten seconds, and nothing that anyone else will act on. It can tell you whether your private expectation is in a different region from the obvious arithmetic. What it cannot do is satisfy a single document or test on this page, because it never asked for one.

Common questions

Can I show a calculator output to a buyer as a starting point?

It is better not to. It signals that no valuation has been done, and it anchors the conversation to a figure nobody can defend.

Do I need a formal valuation to sell?

Usually not. A buyer forms their own view. Pay for one when the question is whether to sell at all, or when a body requires it.

What if my records do not reconcile?

Fix that first, with your accountant. Every requirement on this page depends on it, and it is the one problem no adviser can present around.

Who decides which earnings basis applies?

The buyer, in practice, according to whether they will run the business themselves or pay someone to. Know both figures before the conversation starts.