- Differences between “Reported Value” of Investments on the Form 468 and other SBA filings and “Fair Value” defined in Statement of Financial Accounting Standards No. 157.
- Treatment of liquidation preferences held by SBICs and other investors;
- Clarification of the terms “self-financing” and “positive cash flow from operations” as used in SBA’s model valuation policy;
- SBA’s use of a valuation contractor to perform independent valuations of selected SBIC portfolio assets, and procedures to be followed by SBICs seeking to rebut the contractor’s valuation of an asset; and
- Factors that SBA will consider in determining the acceptability of a third party valuation professional retained by an SBIC pursuant to 13 CFR §107.503(c).
1. Differences between “Reported Value” of Investments on the Form 468 and other SBA filings and “Fair Value” as defined in Statement of Financial Accounting Standards No. 157.
2. Treatment of Liquidation Preferences. Although SBA’s current model valuation policy does not discuss liquidation preferences, SBICs should account for liquidation preferences as follows:
- If other investors obtain liquidation preferences and these preferences cause the value of an SBIC’s investment to decline, then the SBIC must recognize that decline per Model Valuation Policy paragraph C.4.
- If the SBIC’s investment provides for liquidation preferences, the SBIC’s valuation should take into account the downside protection afforded by the preferences, up to the cost of the investment, in the event that the value of the underlying company deteriorates. When considering the protective impact of its own preferences, the SBIC must also consider the potential unfavorable impact of preferences held by other investors.
- If a company receives a new round of financing with a meaningful portion of the financing provided by a sophisticated, unrelated new investor which results in a higher valuation of the company as a whole and consequently of the Licensee’s previous investments in that company, the valuation of those previous investments should consider all existing liquidation preferences, regardless of whether their effect on value is positive or negative. However, the adjusted value that may be given to the Licensee’s investment in either the latest round of financing or any previous round may not exceed the price of the latest round.
3. Clarification of the term “Self-Financing” and “Positive Cash Flow from Operations” in Model Valuation Policy
4. SBA’s Use of Valuations Performed by Contractor and Procedures for Response by SBICs
- the portfolio of an SBIC in Restricted Operations and Liquidation.
key portfolio assets that concern SBA, based on factors such as:
- Financial deterioration of the company;
- Sustained market deterioration for the industry in which the company operates; or
- Significant round of investment with preferences in which the SBIC did not participate.
- an SBIC’s portfolio or investment(s) where the value is critical to a request by the SBIC for SBA approval on a particular matter or issue.
5. Third Party Valuation Retained by SBIC
- The third party must be independent from the SBIC, its affiliates and the portfolio company being evaluated. The SBIC must disclose in writing any prior, current or prospective arrangement or relationship that the valuation expert or its affiliates will or have had with the SBIC, its affiliates, and/or its portfolio companies. The third party’s compensation for performing the valuation must not be contingent in any way upon the result and the SBIC must submit a written certification to this effect.
The third party must be qualified. The SBIC must submit information acceptable to SBA regarding the third party’s professional background and experience, including:
- All professional accreditations maintained by the third party.
- List of similar engagements performed within the previous twelve months.
- List of at least 3 client/customer references, including customer names, organizations, and phone numbers for which the third party has performed valuation services on similar assets being valued.
- Sample valuation report.
- Name, email address, and phone number of third party.
The SBIC must provide the proposed third party with a copy of its SBA-approved Valuation Policy. The SBA will contact the third party to ascertain the third party’s familiarity with the SBA Valuation Guidelines, experience with similar assets being valued, and the approach the third party intends to take for the asset(s) being valued.
- The third party valuation report must meet accepted professional standards. SBA considers the standards from any of the following societies to be acceptable: American Society of Appraisers (ASA), the Institute of Business Appraisers (IBA), and the National Association of Certified Valuation Analysts (NACVA). If the third party proposes to use a different set of standards, the SBIC must submit a copy of these standards to the SBA for consideration and approval.
The third party valuation report must:
- Be signed by the third party and include a certification signed by the third party that the third party has no ownership or economic interest in the asset(s) appraised, or other conflict that could raise issues as to the appraiser's independence or objectivity
- Describe all assumptions and limiting conditions.
- Describe the asset(s) being valued, including, as applicable, type of security, number of shares, cost, and the effective date of the valuation.
- Include a comprehensive business description associated with the asset being valued.
- Include a detailed financial analysis, including discussion of the financials of the underlying business, adjustments made and reasons for adjustments, projections used in the valuation and key assumptions, and comparison to the industry within which the business operates.
- Explain the valuation methodology used, reasons for why the method was selected, all appropriate variables used in the valuation method and supporting rationale.
- Include the Enterprise Value (The Enterprise Value is defined as the value of financial instruments representing ownership interests in an entity plus net financial debt of entity. Net financial debt is the sum of short-term debt, current maturities of long-term debt and long-term debt, less cash and cash equivalents and marketable securities) and Fair Value of the portfolio company associated with the asset being valued.
- Include a waterfall of how the Fair Value of the portfolio company would be distributed if the portfolio company were to exit at the identified Fair Value considering all liquidation preferences.
- Include the current Fair Value of the asset(s) being valued.
- Include the Reported Value of the asset(s) being valued, along with an explanation of how the Reported Value was determined in accordance with the SBIC’s approved Valuation Policy.
Attachment 1 – Information Needed from SBICs for SBA Contractor Valuations
Annual financial statements (balance sheet and income statement) for prior three year
Most recent month’s interim financials
Current financial forecasts for remainder of current year and next year if available. If less than 3 months left in current year, the following year’s forecast is very important.
Preferred stock investment document (liquidation preference)
Most recent Form 468
Business plan (if available)
Company brochure or web site
Phone number and e-mail address for CEO and CFO
Recent management reports/Board presentations