SBA-Compliant Business Valuations: Common Financial Adjustments Explained

When assessing small businesses for SBA loans, lenders and brokers typically begin with the company’s financial statements. But those statements rarely reflect the true economic picture. To get to fair market value (FMV), financial adjustments, called normalization adjustments, are essential. These adjustments help present a realistic view of earnings and cash flow, consistent with SBA standards.

At Concluded, we specialize in SBA-compliant business valuations. Our team applies a consistent, defensible approach to ensure every adjustment is backed by data. By doing so, we help lenders and brokers make better-informed lending decisions.

Why Normalization Adjustments Matter

Normalization adjustments align financials with what a hypothetical buyer would expect if they were operating the business. Without these adjustments, earnings may be distorted, leading to either inflated or undervalued FMV.

SBA loan valuations must follow SBA Standard Operating Procedures (SOPs), which require the valuation to reflect fair market, not buyer-specific, conditions. Adjustments commonly include items like owner compensation, rent, and one-time expenses. However, many proposed adjustments fail to meet SBA’s high standards and must be carefully vetted.

Common Financial Adjustments in SBA Valuations

1. Owner Compensation
Small business owners often pay themselves above or below market rates. We normalize this by analyzing:

• Industry compensation benchmarks

• Local market wage data

• Owner responsibilities

We also remove salaries for passive owners unless they contribute meaningful work. Claims like “I overpaid myself by $30,000” are tested against reliable sources like ERI and PayScale.

2. Manager Salaries
When a third-party manager runs the business but the buyer plans to replace them, their salary may be added back to earnings. We verify:

• Actual compensation using W-2s or payroll records

• Whether the manager’s role is truly redundant

3. Family Member Compensation
Many owners pay family members at non-market rates. We adjust these based on:

• Job duties

• Local wage benchmarks

• Payroll documentation

Unsupported adjustments are excluded.

4. Rent Adjustments
If the seller owns the property, rent may be over- or under-market. We use:

• Lease agreements

• Real estate appraisals

• Market rent data

Even when real estate is part of the sale, a normalized rent expense is applied for valuation consistency.

5. Non-Recurring or One-Time Expenses
Sellers often want to remove items like one-time legal fees or equipment repairs. These can be valid if they are:

• Truly non-recurring

• Clearly unrelated to ongoing operations

• Supported with receipts or contracts

No documentation, no adjustment.

6. Travel, Meals, and Entertainment
Personal expenses recorded as business expenses are frequently flagged. We require:

• Itemized receipts

• Clear justifications separating personal from business use

For example, a $12,000 “travel” claim must be tied to business outcomes to be included.

7. Owner Benefits (Health & Retirement)
Benefits like health insurance premiums and retirement contributions are typically discretionary and added back if verified by tax filings or payroll records.

8. Non-Business-Related Income
One-time income from grants, asset sales, or unrelated activities is excluded unless it is expected to recur under normal business operations.

Commonly Rejected Adjustments

Some proposed adjustments may seem logical but do not hold up under SBA scrutiny:

• Advertising and Marketing Cuts: Sellers may say they’ll eliminate marketing spend without impact. Without proof, that claim is rejected.

• Benchmark-Based Claims: Industry averages can support context but cannot override actual business data.

• Personal Expenses Without Receipts: Adjustments must be supported. Family phone plans and unverified meals are typically excluded.

How These Adjustments Affect Valuation

Here’s an example:

• Reported EBITDA: $225,000

• Adjustments:

  • Officer Compensation: +$40,000

  • Payroll Taxes (7.65%): -$3,060

  • Rent Adjustment: -$10,000

  • Repairs: +$7,500

  • Professional Fees: +$12,000

  • Travel/Entertainment: +$6,000

  • Total Adjustments: +$52,440

• Normalized EBITDA: $277,440

• FMV at 4.5x EBITDA:

  • Before Adjustments: $1,012,500

  • After Adjustments: $1,248,480