The SBA recently released an updated SOP (50 10 v8.1) with meaningful changes made to 7(a) loans for business acquisitions.
Quite a few changes from the previous version, but a few of the highlights:
1. Debt Service Coverage (“DSC”)
DSC increases for most change-of-ownership acquisitions from 1.15 to 1.25x. The new rules stipulate that the coverage must be based on the last 1-2 fiscal years, and importantly, that lenders may no longer rely on projected cashflow to satisfy coverage requirements.
2. Quality of Earnings (“QoE”)
Where the purchase price is >=$3M (excl. owner-occupied commercial property) for initial acquisitions and business expansions, the new SOP mandates that a QoE analysis must be commissioned. This work must be commissioned by the lender, although a) the cost of this can be passed onto the borrower; and b) any amount the borrower spends out-of-pocket on the QoE report counts towards the equity injection. The QoE report is what determines the earnings figure for coverage metrics.
This probably isn’t as big a change as it sounds—for the most part getting a QoE done for a business of that size is a sensible and practical approach. However, it does mean that buyers should co-ordinate with their lenders to avoid paying twice for QoE work.
3. Seller Transition Period
The permitted transition or consultancy period that a buyer is allowed to agree with the outgoing seller increased from 12 to 24 months in aggregate (incl. any extensions). This is particularly helpful for buyers who have more limited experience in the business’ particular industry, and require extended post-acquisition support.
Note that nothing has changed around the seller’s permitted involvement in the business post-acquisition. In a full exit, the seller cannot remain as an officer, director, stockholder, or employee of the business.
4. Changes to Smaller Acquisitions
For smaller businesses, two updates to highlight:
- 7(a) small loans can no longer be used in change-of-ownership transactions. Previously, where the total size of the loan was <=$350K, lenders could opt to underwrite the loan under a simpler program that required lower DSC, collateral and due diligence requirements. The updated SOP means that all change-of-ownership transactions must be underwritten as standard 7(a) loans.
- Lenders are now required to obtain independent valuations from a qualified source on all loans relating to change-of-ownership transactions. Previously, this was only required for transactions with >$250K of net financing (total financing less the appraised value of any real estate or equipment). As with QoE, the cost of these valuations can be passed on to borrowers, and be counted towards the required equity injection.
The changes come into effect on 01 October 2026.