The SBA Just Changed the Rules for Buying a Business

What the October 1 lending changes mean for owners, buyers, and the advisors who guide them.

Many of the businesses that change hands in our part of the market are bought with help from an SBA 7(a) loan. Nationally, nearly four in five buyers expect to use one. So when the SBA changes how those loans work, it changes how businesses get bought and sold. On October 1, it did. The new rules, known as SOP 50 10 8.1, apply to any loan that receives its SBA loan number on or after that date.

Here is what changed, in plain terms, and what it means for you.

Every sale needs a valuation, with a limited exception for who prepares it. Most SBA-financed changes of ownership require a valuation from a qualified, independent source. For 7(a) Small and SBA Express transactions with a business purchase price of $350,000 or less, the lender may prepare an internal valuation.

Larger deals need a Quality of Earnings report. When the purchase price is three million dollars or more, not counting owner-occupied real estate, the lender must also obtain a Quality of Earnings report. It includes a cash proof that ties reported earnings to the bank records for the trailing twelve months and the last two fiscal years, documentation of every add-back, and an analysis of customer concentration.

The cash flow test is stricter, and it looks backward. For a typical first-time acquisition, the business must now show earnings of at least 1.25 times its total debt payments, up from 1.15 times. The test uses historical results only, either the last fiscal year or an average of the last two. Projections can be reviewed, but they can no longer carry the loan.

Seller notes work differently. The buyer still needs equity of at least 10 percent of the project cost, and for a first-time acquisition that cannot be reduced. A seller note counts toward that equity only if it sits on full standby, with no payments at all, for the life of the SBA loan. Seller notes, other standby debt, and outside investors together can cover no more than half of the required equity. A seller note outside the equity can still be paid, but its payments count against the cash flow test.

Sellers can stay longer. A selling owner can now remain as a consultant or employee for up to twenty-four months after closing, up from twelve. Earnouts, meaning payments tied to the business's future performance, are still not allowed in an SBA-financed purchase.

Buyer eligibility is narrower. Since March 1, every direct and indirect owner of an SBA borrower must be a U.S. citizen or national living in the United States. Green card holders no longer qualify. Smaller acquisitions can still use 7(a) Small and SBA Express loans, but those loans must meet the applicable change-of-ownership requirements, including the required cash flow analysis and debt coverage standards.

These changes arrive alongside higher borrowing costs. The Federal Reserve raised rates in September, and the prime rate now sits at 7 percent. Consider a business with $400,000 of verified annual earnings. Before October, on a ten-year loan at prime plus three points, that business could support roughly $2.2 million of SBA debt. Under the new coverage test at today's rate, it supports roughly $2.0 million. Same business, same earnings, and about $200,000 less financing available to the buyer.

For owners. Two things matter most now. The first is your books. A business whose earnings can be verified from tax returns and bank statements will finance. One that relies on undocumented cash or generous add-backs will struggle, because the lender is now required to check. The second is your price. A number that an independent appraiser will support is no longer just good strategy. It is a condition of your buyer's financing. This is why our sale prices average ninety-four percent of our valuations. We price for the market, and now the lender does too. It is also worth deciding early whether you are open to a seller note, and on what terms, because the answer shapes who can buy your business.

For buyers. Expect more documentation, a longer underwriting process, and a closer look at your own eligibility. Have your 10 percent ready in cash or another eligible source, and confirm the citizenship of everyone who will hold an ownership stake, including through an LLC or trust, before you make an offer.

For advisors. If a client is selling, buying, or holding seller debt, timing now matters. Which rules apply depends on when the SBA received the application, not when the deal was signed. Clients planning a sale in the next year or two benefit most from getting their financials ready now, while there is still time to fix what a lender’s review would find.

None of this means fewer good businesses will sell. Buyers are still active, and they are still competing for well-run companies. It means the businesses that sell well will be the ones that are prepared, documented, and realistically priced. That has always been our advice. The new rules simply make it a requirement.

Wondering how the new rules affect your business or your client's?  Reach out for a confidential conversation, or download the Seller Readiness Checklist to see where your financials stand.

This article summarizes SBA SOP 50 10 8.1 for general information and is not legal or lending advice. Loan terms vary by lender. Confirm specifics with your SBA lender before relying on them.