Tag Archives: financials

The Evolving World of Appraisals: What You Need to Know

The world of appraisals is undergoing significant changes. Understanding these shifts is crucial, whether you are buying, selling, refinancing or building. Your lender will typically require an appraisal. Being informed about the process and the recent changes can help you navigate it more effectively.

The New Landscape of Appraisals:

  • Debt coverage vs. loan to value (LTV): Appraisers and lenders have shifted their focus from primarily relying on LTV. LTV is the ratio of the loan divided by the appraised value. Instead, the appraisers and lenders are emphasizing total debt coverage. This approach assesses what percentage of your expenses are going to be tied up in financing costs. They will also evaluate post-closing liquidity and cash flow.  
  • Decreased reliance on business potential. When determining the value of your property, lenders are now more conservative, especially for new businesses. They will not loan more than the appraised value of the property, unless additional collateral is considered. For new ventures, appraisers tend to be very cautious.
  • Tax returns vs. financial statements. Some government guaranteed lenders are instructing appraisers to focus on tax returns to uncover the “true” financial picture, rather than relying solely on financial statements. Since tax returns and financials break down expenses and revenue differently, and business owner often file their taxes in a way to minimize tax liabilities, there can be discrepancies. At GRP Capital, we compare tax returns with financial statements to determine the true profitability of a business. Further, we work with appraisers to help align their conclusions. We can collaborate with your accountant to reclassify expenses and revenue to enhance the appraised value.
  • Appraising a business: As-is, As-Complete and As-Stabilized: Appraisers will evaluate your property and business in three ways: as-is (without any renovations or changes); as-complete with improvements (including completed renovations and operational changes) and as-stabilized (considering a future alignment operational efficacy and stabilization). Understanding these distinctions can help you plan your appraisal strategy effectively.

Planning for an Appraisal Site Visit

• For Sellers and Owners: First impressions matter. If you are the seller or the current owner seeking a refinance, ensure your property is clean, well-maintained and presentable. Appraisers want to inspect all areas including public areas and “back of the house” sections. Providing requested documents promptly, such as current financials, building information and surveys, can also positively influence the appraisal process.

• For Buyers: Buyers should communicate their business vision to the appraiser clearly. Highlight any new ideas for enhancing revenue and controlling expenses, planned renovations and your strengths in ownership or management of similar businesses. This can help the appraiser see the full potential of the property.

• A Note on Property Condition Reports: Borrowers can arrange for a PCR (Property Condition Report) during the bidding stage, even before a Purchase Sale Agreement is in place. Unlike appraisals, a PCR focuses solely on the property’s condition, providing honest and independent feedback on what maintenance and renovations are needed in the immediate, short term and long term future.

If you’re ready to discuss financing your future business plans, our team is here to help.  We offer complimentary initial business evaluations. We have a network of lenders for acquisitions, refinances and construction projects. Our team is ready to guide you through the entire process.

accountant working on documents

The Importance of Monthly Financials for Business Owners

All members of our GRP Capital team understand the value of monthly financials. This is especially the case when seeking financing or selling a business or property. If you’re not already creating or receiving monthly financials, we strongly recommend you start this process right away.

Finding Patterns Early

When you only receive financials quarterly, it is hard to spot emerging patterns. As a business owner, you may be very well aware of new contracts and vendors. These can include the big ticket items like equipment rental and insurance. However, following each line of a profit and loss statement monthly often reveals other expenses that are creeping up. Conversely, they can also reveal weakening or softening income sources.

Nimble decision-making:

If you are conversant with your monthly financials, you have enough time to course correct. You can quickly assess:

  • Whether you need to change rates or prices
  • If you should switch between payroll and contract labor
  • How effective your marketing plan is
  • How this month compared to the same month last year

Ultimately, if you only receive financials quarterly, you may miss your entire high season without a chance to act appropriately.

Understanding your financial position

Don’t forget balance sheets. Be sure that you or your accountant creates balance sheets in addition to Profit & Loss statements (P&L). Your P&L shows your income and expenses. Your balance sheet includes all of your long-term and short-term debts (your mortgages and other loans, including SBA EIDL loans). These debts are listed along with your assets. Assets include real estate, furnishings, accounts receivable and stock on hand, as well as your money in various bank accounts.

Your balance sheet will help you determine your DCR (debt coverage ratio), which is a critical figure to know when you are looking for future financing.  For more information about debt coverage ratio and appraisals, consult with our GRP Capital team. 

Preparing for financial transactions

If you are in need of financing, any lender will require current financial statements. Waiting for the end of the quarter may not be an option. If you think that you will be in a position to sell, buy or refinance, switching immediately to monthly financials will prevent any delays in the underwriting process and even in obtaining a variety of competitive term sheets from lenders.

Our GRP Capital team collaborates with you and your accountant to be sure the financial documents make the strongest case for a lender.

DIY vs. CPA: Choosing the Right Approach

If your business is rather simple, and if you have an accounting background, you may be able to create your own financials statements. This is especially true if you do not have ownership in  multiple businesses. However, for most of our clients, their money is well spent on hiring a professional.

A knowledgeable CPA will be able to recommend strategies to lower your tax outlay throughout the year. With just a few pieces of well-timed advice, you will quickly learn that a CPA is an essential regular expense.

Whether you are buying, refinancing, building, expanding your existing portfolio or investing in your first business, GRP Capital has the resources to help you meet your required capital needs. Contact any member of our GRP Capital team for a free consultation to determine next steps. We have access to a large network of lenders to help you meet your business goals.