What if the purchase price is above the SBA valuation?
Short answer
You must cover the gap with equity. SOP 50 10 8.1 says any amount paid above the business valuation must be made up by equity. That equity can include seller debt on full standby. Source: App. 15, Paras. C.1.a and C.2.a.
The difference has to come from equity, not more acquisition debt. SOP 50 10 8.1, Appendix 15, Para. C.1.a, says the valuation must support the Business Purchase Price however the debt is structured.
Why more debt cannot fill the gap
Para. A limits total debt supporting the deal to the business valuation amount. That limit includes seller debt that is not on full standby.
Your options for the gap
- Add cash from unlimited equity sources.
- Use limited sources beyond the usual cap. Para. C.2.a allows this when the price exceeds the value supported by the valuation and any Quality of Earnings report. Those added funds must be on full standby.
- Renegotiate the price.
A worked example
Say the purchase price is $1,200,000 and the valuation supports $1,000,000. The $200,000 gap must be equity. The SOP does not say whether that gap also counts toward the minimum injection. Ask your lender.
A second way the loan can shrink
A Quality of Earnings report can also reduce the loan. If coverage based on the report does not support the valuation and proposed debt, the loan amount must be reduced. Additional equity may be used to make that adjustment (Para. A).
Ask lending partners about your loan
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