Bulletin – April 2005
News Flash: The Bulletin is Back.
The Bulletin has returned to provide information on the Canada Small Business Financing Program. It will continue to deal with information on the Program that will be useful for lenders. We welcome your comments and invite you to submit topics you would like to see covered in the future.
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Appraisals
The topic of appraisals was covered in the July 1999 Bulletin (PDF Version, 32 KB — 1 page) and also in our Guidelines (Section A, Item 5.3). This edition of the Bulletin deals with certain aspects of the appraisal requirements which require further clarifications.
Appraisals in a nutshell
When required: An appraisal is required where the borrower is purchasing all or substantially all the assets of a going concern, assets not at arm's length, or assets from the lender, that are or were used to secure a conventional loan. The lender can use an appraisal that was made within 180 days before the date of the loan approval.
The appraiser: The appraiser must be impartial and at arm's length with the borrower. In the case of real property or leasehold improvement loans, the appraiser must be a member of a relevant professional association and be qualified to conduct appraisals. In the case of equipment loans, when there is no professional association, the appraiser may be a supplier, an auctioneer or an expert who deals with that type of equipment.
Value of the asset: The appraisal must reflect the fair market value of the asset. The eligible cost is the lower of the purchase price or the fair market value in the appraisal.
Questions and clarifications
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Date of loan approval and appraisal: Since the Regulations state that the appraisal must be provided before the loan is approved, can the lender approve a loan on the condition that the borrower obtain an appraisal? Does the date of approval then become the date the appraisal is obtained?
Answer: where an appraisal is required, lenders can approve a loan application conditional upon obtaining an appraisal and the approval does not become final until the appraisal is obtained. In this case, the date of approval will be the date the condition is satisfied. This will avoid the issue of the borrower having to spend money before he knows that he has been approved by the lender.
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Going concern: This means a business that has carried on operations at any time within 60 days prior to purchase or, in the case of a small business that operates on a seasonal basis, during the season prior to purchase.
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Substantially all: In assessing whether a sale involves "substantially all" of the assets of a going concern, lenders should consider the percentage of total assets being sold, whether the transaction would fundamentally change the nature of the business, and whether the vendor's normal business activities can continue without the assets that are being sold.
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Breakdown of the purchase price in agreements of purchase and sale for a going concern: Some agreements may be for the purchase of assets eligible for financing (real property, equipment and leasehold improvements) and assets which are not eligible for financing (inventory, goodwill, interest in a franchise, telephone, etc.).
Where the purchase price for these assets is one amount, the price for each eligible asset acquired by the purchaser-borrower must be provided in the agreement of purchase and sale. The appraisal of those assets cannot be relied upon to establish the amount paid by the purchaser for those eligible assets.
If the purchase price for each eligible asset cannot be established, the amount of the loan for the eligible assets cannot be confirmed. In the event the purchase price for the eligible assets cannot be provided in the agreement of purchase and sale, substantiating documentation that sets out the allocation of the purchase (e.g., the purchaser's opening financial statement, election filed with the Canada Revenue Agency, etc.) will be accepted.
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