The SBA has released a significant update to its Standard Operating Procedures (SOP) that impacts equity requirements, seller note structures, and eligibility criteria. Here’s what SMBootcamp alumni need to know:
1. Minimum 10% Equity Requirement & Changes to Standby Seller Notes
Summary: A minimum 10% cash equity injection is now explicitly required for complete changes of ownership, and standby seller notes only qualify as equity if on full standby for the loan’s 10-year term.
In-Depth:
- This change eliminates flexibility around using 2-year or partial standby seller notes to bridge valuation gaps.
- Model your DSCR calculations assuming no note payments are excluded by the lender.
- Plan to provide the full 10% equity in cash, though you can raise investor equity to cover this injection.
2. Equity Rollovers are Basically Dead
Summary: Sellers retaining any equity must now personally guarantee the SBA loan for two years and be listed as co-borrowers, and new investors must also co-borrow—making partial buyouts impractical.
In-Depth:
- Most deals will need to be structured as 100% buyouts, as sellers and investors are unlikely to agree to co-borrower status.
- Licensing continuity via seller equity is now problematic; consider alternative license-holder arrangements.
3. Equity Investors Under 20% Do Not Automatically Provide Personal Guarantees
Summary: In 100% buyout scenarios, minority investors (<20%) aren’t required to personally guarantee the loan—guarantee rules apply only to partial ownership changes.
In-Depth:
- Minority investors can hold positions without personal guarantee implications, provided the transaction is a full buyout.
4. Seller Financial Verification Flexibility for Carve-Outs
Summary: For carve-out transactions, lenders can now accept CPA-reviewed statements, sales tax records, and other documentation instead of tax returns.
In-Depth:
- This benefits alumni targeting business segments or e-commerce carve-outs.
- Don’t assume tax returns are optional for most deal types without explicit lender confirmation.
5. Franchise Deals Simplified, But Active Oversight Required
Summary: If the franchise is SBA-approved, lenders skip FDD reviews—but you must demonstrate active operational control to avoid being classified as passive ownership.
In-Depth:
- Active oversight includes approving budgets, controlling accounts, and managing staff.
6. CBD and Hemp-Related Businesses Clarified as Potentially Eligible
Summary: Hemp businesses (<0.3% THC) are explicitly eligible; consumer-facing CBD products remain risky without FDA compliance.
In-Depth:
- Marijuana-related businesses are still prohibited, but compliant hemp deals may qualify with strict documentation.
7. Stricter Ownership Rules for Non-U.S. Citizens
Summary: Only businesses fully owned by U.S. Citizens, green card holders, or U.S. Nationals qualify; any recent non-eligible ownership can disqualify the loan.
In-Depth:
- Conduct early diligence on ownership history and documentation for international parties.
Recommended Next Steps
- Reevaluate Capital Structures: Plan for 10% cash equity injections and don’t rely on short-term standby notes.
- Address Licensing Early: Identify license holders upfront and set seller expectations post-closing.
- Engage SMB Loan Support Early: Validate deal structures against the new SOP before finalizing LOIs.
