This article is valuation commentary. It is not legal, tax, accounting, or investment advice. Specific engagements depend on facts and applicable professional standards.
The lender orders the valuation, not the buyer or seller
The first practical point is that in a 7(a) deal you work through the lender, not directly through SBA. Version 8 (effective June 1, 2025) and Version 8.1 (effective October 1, 2026) are both explicit that the business valuation must be requested by and prepared for the lender, not the applicant or seller. The lender may not use a business valuation prepared for the applicant or the seller. The cost may be passed on to the borrower, and under 8.1 what the applicant spends on the report counts toward the equity injection.
That distinction matters. Brokers, sellers, and buyers sometimes commission “valuations” in advance to support a price target. Those reports may be useful for negotiation, but they generally do not satisfy the SBA lender’s file requirement. The SBA-required valuation is a separate engagement, ordered by the lender, with the lender as the named user. That’s what closes the loan.
Every change of ownership now needs an independent valuation
Under Version 8 the lender ran a simple test: total financing less appraised commercial real estate less appraised equipment. If the remainder was $250,000 or less and buyer and seller were unrelated, the lender could value the business itself. Version 8.1 removes that tier. Its change-of-ownership appendix requires an independent Qualified Source valuation on every change of ownership, whatever the size, so the close-relationship rule no longer has any work to do.
- The lender may value the business itself when the financed amount net of real estate and equipment is $250,000 or less and buyer and seller are unrelated
- Above $250,000, or with a close buyer-seller relationship, an independent Qualified Source valuation
- Special-purpose property: the business valuation performed by a Certified General Real Property Appraiser with four equivalent going-concern appraisals in the prior 36 months, allocating land, building, equipment, and intangibles
- An independent Qualified Source valuation on every change of ownership, requested by and prepared for the lender
- The valuation must support the purchase price; any amount paid above it is equity, and total debt is capped at the valuation
- A quality of earnings report with a cash proof when the purchase price is $3 million or more (initial acquisitions and business expansions)
- Real estate appraised separately by a state-licensed or state-certified appraiser, and by a state-certified appraiser above $1 million
The valuation also caps the debt. Version 8.1 says the total debt supporting a change of ownership, including seller debt that is not on full standby, is limited to the business valuation amount, and that anything paid above the valuation must be made up by equity. A credible report has to support the structure of the transaction, not just produce a high enough number.
Who qualifies as an independent qualified source
What the valuation must cover
The core SBA concept is that the business valuation addresses the business being acquired, while commercial real estate is separately addressed through appraisal or evaluation requirements. The current SOP states that determining the value of a business “not including real estate, which is separately valued through a real estate appraisal” is the key component of the analysis for a change-of-ownership loan. SBA explains why: a change in ownership creates new debt unrelated to operations and can create intangible assets. Beyond confirming a price, the valuation documents the credit file, showing what specifically is being financed.
The report scope can’t be generic. An asset deal and a stock deal have different included assets, liabilities, tax consequences, and assumed obligations. SBA’s current text specifically says the scope should identify whether the transaction is an asset or stock purchase and should be specific enough to show what is included in the sale, including assumed debt. In practice, that means the valuation should line up with the purchase agreement, the financing uses, and any separate asset allocations the lender is relying on.
Version 8.1 adds two requirements to the report itself. It must include the individual’s conclusion of value, qualifications, and signed certification, and it must support the purchase price regardless of how the debt is structured. The lender then obtains the financial information the appraiser relied on and verifies it against the seller’s IRS transcripts.
Quality of earnings at $3 million and up
Version 8.1 adds a second report for larger deals. For initial acquisitions and business expansions where the purchase price is $3 million or more, measured before buyer equity, seller debt, or other financing, the lender must obtain a quality of earnings report in addition to the business valuation. Owner buyouts and ESOP and cooperative transactions are exempt. The QoE must be performed by an independent, experienced financial professional for the benefit of the lender, and it cannot be prepared by or for the borrower or seller.
The report has to reconcile accountant-prepared statements, tax returns, internal statements, and IRS transcript data to a normalized earnings figure, document every add-back and adjustment, assess customer concentration and contract continuity, and include a cash proof: a reconstruction of cash receipts and disbursements tied to bank statements, run on a trailing twelve-month basis and for the last two fiscal years. The lender must use the QoE earnings in its debt service coverage calculation, and if that coverage does not support the valuation and the proposed debt, the loan amount comes down.
Real estate, equipment, and special-purpose property
This is where many otherwise straightforward acquisitions become specialist assignments, because the architecture is not one blended number: real estate triggers separate appraisal or evaluation rules, equipment values may need separate support, and special-purpose property has to be split between the business and the real estate rather than valued as one number.
Commercial real estate
For Standard 7(a) loans (above $350,000), lenders must obtain an appraisal by a state-licensed or state-certified appraiser when commercial real property secures the loan. For 7(a) Small and SBA Express loans secured by commercial real estate, an appraisal is required when the transaction involves parties with a close relationship or when SBA or the lender concludes an appraisal is needed; otherwise the lender must obtain an appropriate evaluation consistent with safe and sound banking practices. For existing buildings financed with SBA proceeds, the borrower generally must occupy at least 51% of the rentable property; for new construction, at least 60% initially. Under 8.1’s collateral appendix the appraisal must be USPAP-compliant, dated within twelve months of the application, and prepared by an independent state-licensed or state-certified appraiser, with a state-certified appraiser required when the estimated value exceeds $1,000,000. The lender is the client or intended user, and an appraisal prepared for the seller or applicant cannot be used.
EPC/OC structures
If the transaction uses an Eligible Passive Company / Operating Company structure, lease economics matter. Under 13 CFR 120.111, the EPC can hold the real estate and lease it to the operating company, but the lease must be in writing and subordinate to SBA’s lien. Rent cannot exceed the amount needed for debt service plus direct holding costs. The lease term must at least match the loan term. The operating company must be a guarantor or co-borrower depending on structure and use of proceeds. For property-rich acquisitions, this is why real estate and operating-company analysis cannot be treated as separate silos.
Stepped-up equipment values
Both versions say that if fixed assets are valued above net book value, the lender must obtain an independent appraisal by a qualified individual to support the higher number. A fixed-asset value embedded inside a business valuation does not satisfy that requirement. In plain English, if the transaction depends on a stepped-up equipment number, the business valuation alone will not solve that problem.
Special-purpose property
The ESOP exception
There is one narrow caveat: the SBA carries forward a specific exception for certain ESOP-related 7(a) loans. In that limited context, an independent business valuation is not required if the lender uses the ESOP valuation prepared in accordance with ERISA specifications. That’s an exception to the general rule, not the rule itself. For ordinary buyer-seller acquisition loans, the standard requirements apply.
When the valuation has to be in the file
For applications submitted through the Loan Guaranty Processing Center, the valuation goes in with the application. Under delegated authority, Version 8.1 allows the valuation and any QoE to be obtained and reviewed after the SBA loan number is issued and before closing, but only if they are already in process: the vendor retained and an engagement letter in place by the time the loan number is issued. Until the due diligence is complete, the credit memorandum carries an estimate of the business’s value, and it is updated with the valuation result and any effect on the purchase price or equity structure. That’s why a buyer can hear “we’re approved” and still not be done with valuation work.
What buyers and sellers should prepare
To keep the valuation engagement on the lender’s timeline, the deal team typically needs:
- Letter of intent or executed purchase agreement, with structure clearly identified (asset vs stock)
- Three to five years of financial statements for the target business
- Three to five years of business tax returns
- Year-to-date financials through the most recent month available
- Bank statements for the trailing twelve months and the last two fiscal years, for the cash proof when a QoE applies
- Customer concentration data: top 10 customers, revenue, contract terms
- Detailed equipment list with original cost, age, and book value
- Real estate inventory: owned, leased, related-party arrangements, recent appraisals
- Buy-sell, shareholder, or operating agreement
- Material contracts: key customers, leases, financing
- Environmental reports, if any (relevant for special-purpose properties)
- Lender contact and engagement instructions
What delays closings
- Seller-side valuations the lender can’t use. The valuation has to be lender-engaged, not seller-engaged. Sellers who try to short-circuit this by handing over their broker opinion add delay.
- Misalignment between purchase agreement and valuation scope. If the valuation is built for an asset purchase but the deal is structured as a stock purchase (or vice versa), the lender will require a revised report.
- Stepped-up equipment values without separate appraisal. A business valuation that includes equipment above book value won’t close the gap. The lender needs a separate equipment appraisal.
- A special-purpose property valued as one number. A hotel, a car wash, or a gas station needs the real estate, the equipment, and the business value separated and reconciled, whichever version of the SOP governs the file. One blended going-concern figure leaves the lender without the pieces it has to document.
- A quality of earnings report ordered late. Under 8.1 and delegated processing, the valuation and the QoE must both be formally engaged, with an engagement letter in place, by the time the SBA loan number is issued.
- Close-party relationships not disclosed up front. If buyer and seller have a family or business affiliation that triggers the independent-valuation requirement, undisclosed relationships create rework.
- Real estate occupancy below thresholds. 51% owner-occupancy for existing buildings, 60% for new construction. Below those thresholds, the deal may not qualify for SBA financing.
Where LHM fits
The business valuation in an SBA file has to come from a Qualified Source as the SOP defines it, and the definition turns on the credential itself. LHM’s principal holds the California Certified General Real Estate Appraiser license and is a candidate for the ASA designation in business valuation. Candidacy is not the accreditation the SOP names, so for the lender’s file the business valuation comes from an accredited source, and LHM’s role is the property side and the reconciliation.
That side is where most of the friction is. LHM prepares the commercial real estate appraisal the collateral appendix requires, going-concern appraisals of special-purpose property that separate land, building, equipment, and business value, and the analysis that ties the allocation to the business valuation and the quality of earnings so the lender’s file tells one consistent story. Owners can also engage LHM for a valuation of their own before a letter of intent, knowing the lender will order its own.