3 Important Parts Of Business Equipment Appraisals For The SBA
If you are looking to buy or sell business equipment, then this article explaining SBA (Small Business Association) loans could likely save you from some heavy bumps in the road. Getting an appraisal for buying and selling large equipment in a business setting is not only required by the SBA in many cases, but is extremely important in proving the value of equipment and ensuring you are well-informed about its’ worth.
In this article, you’ll learn:
- The Difference between a Special Purpose and Non-Special Purpose Property
- Requirements for a Non-Special Purpose Property Appraisal
- Why you need two appraisals for certain business equipment transactions
- How you can best identify the right Appraisers for your situation
First, we want to understand the difference between a Special Purpose and Non-Special Purpose Property. The SBA classifies properties under two essential categories:
- Special Purpose Properties
Special Purpose Properties are usually real estate heavy businesses like golf courses. To have these types of businesses valued, an interested party is required to hire a Certified General Real Property Appraiser. A Certified Equipment Appraiser may also be required in certain situations. Appraisals for these businesses are required if the following conditions are met:
- The loan amount is greater than $250k
- It’s a related party transaction
- Internal policies and procedures require an independent valuation
Important: The appraisal being performed must assign a value to the land, buildings, equipment, and what are known as “intangible assets”. Here are the categories and basic lists of Special Purpose Properties as defined by the SBA. Give them a look and see if the business you’re dealing with falls into any of these categories.
- Golf Courses
- Sports Arenas
- Tennis Clubs
- Bowling Alleys
- Swimming Pools
Travel and Entertainment:
- Amusement Parks
- Hotels, Motels, Lodges
- Funeral Homes w/ Crematoriums
- Hospitals, Surgery, Urgent Care Centers
- Nursing Homes, Assisted Living Facilities
- Car Wash Properties
- Gas Stations
- Service Center
- Quarries and Gravel Pits
- Oil wells
Other Special Purpose Properties:
- Cold Storage Facilities >50% Refrigeration
- Sanitary Landfills
If the business you’re potentially involved with is not on this list above, then it is considered a Non-Special Purpose Property. This type of business may require a Business Appraiser. When is a 3rd party business appraisal required?
In regards to a change in ownership of a Non-Special Purpose Property, the requirements are listed here.
- If the amount being financed minus the appraised value of real estate and/or equipment is greater than $250k
- If it is a related party transaction
- If internal policies & procedures require an independent valuation
Remember, real estate and business equipment must be valued separately. You’ll want to find a trustworthy, high quality, Certified Equipment Appraiser in the case for valuing equipment.
What is a Certified Equipment Appraiser?
A Certified Equipment Appraiser evaluates equipment for sale as part of a business transaction.
Example: John needs a business loan to buy more equipment and speed up production. John pledges specific business assets as collateral for that loan, an appraiser will review the condition of the assets and the fair market value, to determine the value of the assets.
Another important element to remember: one approach to value is typically not going to be sufficient for the SBA. In virtually every case, the SBA requires at least two approaches to value in a business appraisal if they meet the requirements listed above.
Even if the appraiser thoroughly explains his or her reasoning for using one approach, the SBA will typically require two approaches for the appraisal to be accepted and approved.
Below, you’ll find a list of what SBA considers to be a “Qualified Source” for business appraisals.
- Accredited Senior Appraiser (ASA)
- Certified Business Appraiser (CBA)
- Accredited in Business Valuation (ABV)
- Certified Valuation Analyst (CVA)
- Business Certified Appraiser (BCA)
Let’s further explore types of businesses that need a Certified Appraiser.
Buying and Selling A Business
Before selling their business and equipment, many owners get an appraisal. For an ongoing business, you may need appraisals for the purpose of buying and selling your equipment. You may also be looking to buy out a partner when one of the owners leaves the company.
Business Disputes. Appraisers may be needed to value a business within the process of a business dispute. Shareholder disputes and marital disputes where business property is involved are two examples.
Business Damages and/or Disaster. An appraiser may be needed to value a business for insurance purposes, after a disaster or other damage to the property and assets.
Bankruptcy. The process of business bankruptcy usually includes an appraisal for valuation.
If your business is a corporation or partnership, or if you have multiple subsidiaries or other complex situations, you will definitely need the services of an independent appraiser.
Do I Really Need an Appraiser? Can I Do an Appraisal Myself?
You can create a valuation of your small business at any time. There are equations available to help you determine your equipment value. But if you need a valuation for insurance or selling a business, you’ll need a 3rd party appraiser.
It’s very important that proper appraisal procedures are followed upfront. Failure to take the correct steps often results in extra costs and wasted time. You certainly don’t want to order a new, follow-up appraisal or call back your original appraiser because something wasn’t done correctly on the first round.
Did you know? Appraisals are not required for all SBA transactions. As we mentioned above, the cut off is $250,000. For a 7(a) loan, “SBA requires a real estate appraisal if the SBA-guaranteed loan is greater than $250,000 AND is collateralized by commercial real property.” For a 504 transaction, a real estate appraisal is required “if the estimated value of the Project Property is: (a) Greater than $250,000; or (b) $250,000 or less, if such appraisal is necessary for appropriate evaluation of creditworthiness.”
The appraiser must be independent. There must be no appearance of a conflict of interest. The appraiser cannot have a (direct or indirect financial) or (other interest) in the property and transaction.
The SBA requires a specific type of appraisal. “The appraisal report must be prepared in compliance with Uniform Standards of Professional Appraisal Practice (USPAP)” and be a self-contained appraisal report or a summary appraisal report.
Bonus – The 4th Most Important Part
There is a fourth part of the appraisal process that is arguably the most important for you as a business owner: a Certified Business Equipment Appraiser. It’s critical to find an appraiser who has knowledge of your business’s industry and the resources available to show a strong Standard of Value for the SBA. If you’re looking to sell your business equipment and need a trusted appraiser to help walk you through the steps necessary to properly value your assets, then Auction Masters is here to help. Give us a call today and set up an appointment to have your equipment appraised by a professional team with over 40 years of experience.