Handbook of Business Valuation

By Thomas L. West; Jeffrey D. Jones | Go to book overview

CHAPTER SEVEN
Valuation from the
Lender's Perspective

PETER V. ANANIA

A lender's perspective on business valuations has changed little since the last edition of this book. Commercial lenders have come to realize that when lending to a small operating business (not just making a real estate or equipment loan), cash flow is the key. There is less emphasis on the collateral than there used to be and more interest in the cash flow and how it is allocated to the different levels of capital (bank debt, mezzanine debt, seller debt, shareholder debt, or shareholder equity). What this really means to someone trying to acquire or value a small business is that banks are a little more aggressive on their loan-tovalue ratios (advance rates). This allows a bank to rely less on collateral to justify the loan(s).

Most banks now also have sources of mezzanine, or subordinate, funding, which can be used to acquire a small ongoing business. Mezzanine lenders view the valuation of a business from an entirely different perspective, putting even more weight on the cash flow and the future cash flow projections. They ask, “What will the value be five or ten years from now?”

Lenders view a business valuation from different sets of eyes. Cautious eyes? Definitely. Skeptical eyes? Probably. Willing-to-takea-chance eyes? In most cases, yes. In today's business sales and acquisition market, lending can, and often does, come from a variety of sources.

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