Anonymised, illustrative composite. An independently negotiated, market-tested price was not the question the Regulations asked. The buyer and seller were related, and that fact alone triggered the appraisal.
At a glance
A buyer agreed to purchase the equipment, leaseholds and customer list of his uncle’s precision machine shop for $520,000, financed with a CSBFP-backed term loan of $480,000 — equipment and leasehold improvements at $350,000, intangibles and working capital at $130,000, both inside the programme’s own nested caps.
Before signing, the buyer had received a genuine arm’s-length offer for the same assets from an unrelated party at $505,000. He used that offer to negotiate his own price down and closed at $520,000 — a price with real market evidence behind it, not a number the two relatives had simply agreed between themselves.
The lender’s credit officer, reviewing the file, noted the competing offer and concluded the price was reasonable enough that a formal appraisal was unnecessary paperwork. That conclusion answers the wrong question. The appraisal requirement in the Regulations is not a check on whether the price is fair — it is triggered by who the parties are to each other, and a related-party purchase triggers it regardless of what the price looks like next to a market comparable.
The requested facility split as $350,000 for equipment and leaseholds and $130,000 for intangibles and working capital, both inside the CSBFP’s category caps, for a $480,000 term loan against a $520,000 purchase price.
An independent appraisal, obtained after the gap was caught, valued the equipment and leaseholds at $340,000 against the $350,000 allocation — a modest $10,000 gap — and confirmed the intangibles allocation at $130,000 without adjustment. The regulated cap in subsection (4) applies to the lesser of cost and appraised value, so the eligible loan came down from $480,000 to $470,000.
Section 9(1) of the Canada Small Business Financing Regulations sets out three independent triggers for the appraisal requirement, and only one of them has anything to do with price. The provision requires the borrower to “provide to the lender from… an appraiser who is a member of any professional association that is recognized under a federal or provincial law and who is at arm’s length from the borrower… an appraisal, made within 365 days before the loan is disbursed, of the value of the assets… if a borrower uses, or intends to use, all or part of a loan to purchase (a) assets, or services intended to improve the assets, from a person who is not at arm’s length from the borrower; (b) all or substantially all of the assets of a going concern; or (c) assets from the lender or its representative that… had been used to secure a conventional loan of the lender.”
Paragraph (b) — the going-concern trigger most CSBFP business-purchase files turn on — is entirely about the nature of what is being bought: a running business, arm’s length or not. Paragraph (a) is entirely about who is selling it. A buyer purchasing from a family member, a business partner, or any other non-arm’s-length seller falls inside (a) even where the deal would also independently qualify under (b), and even where — as here — the price has outside evidence behind it that would satisfy almost any other purpose the appraisal could serve. Nothing in paragraph (a)'s wording admits a price-reasonableness exception; a competing offer answers a due-diligence question the Regulations were not asking.
The consequence, once the appraisal is obtained, is the same mechanical rule that applies under any of the three triggers: subsection (4) caps the loan at “the lesser of… the cost of purchasing or improving the asset or both… the appraised value of the asset or improved asset.” The trigger decides whether an appraisal is required; subsection (4) decides what happens to the loan once one exists. They are two different questions, and skipping the first does not make the second go away — it just means the loan gets disbursed on a facility that was never properly eligible.
The buyer’s advisor flagged the relationship before disbursement and arranged the appraisal from a professional member independent of both the buyer and the uncle. The three-week delay pushed closing past the original date but inside the vendor’s extended outside date. The loan was trimmed by $10,000 to match the appraised equipment value, funded from the buyer’s own equity rather than renegotiating price with his uncle.
Disbursing a CSBFP loan without a required appraisal does not merely create a paperwork gap — it puts the government’s loss-sharing guarantee on that facility in question. If a claim were later made on a loan that was never properly eligible for the programme, the lender risks losing the loss-sharing protection the programme exists to provide, converting an insured facility into an uninsured one after the fact, on a file the lender believed was covered. The $10,000 trim was a cheap outcome next to that exposure.
The tell was the credit officer reasoning from the price to the requirement instead of from the relationship to the requirement. A related-party purchase should trigger the arm’s-length appraisal question automatically, on the relationship alone, before anyone looks at whether a comparable offer exists. The comparable offer is useful evidence for other purposes — it is not a substitute for the appraisal the Regulations actually ask for.
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