Does the CSBFP require an independent appraisal?

Buyers who plan to use a Canada Small Business Financing Program loan often assume a full valuation of the business is required. The guidelines are narrower. They require a lender to obtain an appraisal of the market value of particular assets in defined situations, and the appraisal affects how much of the price can be financed. The program makes it easier for small businesses to get loans from financial institutions by sharing risk with lenders, so the lender applies these rules.

When an appraisal is required

The guidelines name three situations. The first is buying an asset, or services to improve an asset, from a person who is not at arm’s length from the borrower; the Income Tax Act deems related persons not to deal at arm’s length. The second is buying all or substantially all of the assets of a going concern. The third is buying from the lender an asset that secured a conventional loan.

What the appraisal limits

Where an appraisal is required, the eligible cost is the lesser of the purchase cost and the appraised value. If the appraisal gives a range, the purchase cost counts in full when it falls within or below the range, and the top of the range counts when the cost is higher. The appraisal is of assets, not of the whole business, and the guidelines say an appraised value will not be accepted as the allocation of the price among the assets. The guidelines say the agreement should set out that allocation, and that in its absence other documents, such as an election filed with the CRA, may be sufficient.

Who can appraise and what does not count

The lender must receive the appraisal before the loan funds are disbursed, and it must be recent relative to the first disbursement. For real property the guidelines require an appraiser who belongs to a professional association and is at arm’s length from the borrower, and equipment may be appraised by an arm’s-length expert in the field. For intangible assets or working capital, they point to an appraiser experienced in such assets, such as a chartered accountant or a chartered business valuator. Book value and a municipal tax assessment are not accepted as appraisals.

Share purchases and who pays

The guidelines also say acquiring shares is not eligible for financing, so the appraisal question arises in asset purchases. Appraisal costs are typically the borrower’s responsibility, although they can be financed through a line of credit or a working capital term loan. See whether the CSBFP covers buying an existing business for the wider picture.