Hi Searchfunder - Happy Friday! I wanted to start a separate thread here, because I think there is some confusion out there stemming from early posts and lender emails about the new SOPredactedSome of the other posts here and on LinkedIn might have jumped the gun. Quick disclaimer: I am not a lawyer, and my legal team is reviewing the SOP in detail right now. But I have gone through the full document myself, and I want to share how I am reading it. SBA's new SOPredactedtakes effect October 1, 2026, and it is the biggest rewrite of the business acquisition rules we have seen in 2 years. Change of ownership now has its own dedicated section, Appendix 15, and if any other part of the SOP conflicts with it, Appendix 15 wins. Please note: my read is different from what some leading SBA loan officers and banks are putting out. The biggest difference is this: my read is that seller notes on full standby can still count for half of the required 10% equity injection, including for initial acquisitions. Here is the actual language from Appendix 15, Credit Standards, Equity Requirements: a) The following are the minimum equity injection requirements for change of ownership transactions based on their type: i) Initial Acquisition: 10%. For Initial Acquisitions, the required equity injection cannot be reduced or eliminated. ii) Business Expansion, Owner Buyouts, and ESOP & Cooperatives: 10% (a) For both Business Expansions and Owner Buyouts, the Lender may reduce or eliminate this requirement if they have determined that the Borrower has sufficient liquidity and working capital to sustain operations following the transaction. When eliminating the equity requirement, the Lender cannot include permanent working capital in this or any other 7(a) term loan request within 90 days. Any working capital necessary to support the transaction must come from existing cash or a line of credit. To qualify for the reduction or elimination of the equity injection, the Applicant’s balance sheet must not have a negative net worth as of the last fiscal year-end. (b) Loans for the purpose of purchasing a controlling interest (at least 51 percent) in the employer for purposes of an ESOP are not subject to the SBA requirement for equity injection. ii. Source of Equity Injections: a) Unlimited Equity Injection Sources: i) Cash that is not borrowed, whether on the business’s balance sheet or from other sources. ii) Cash that comes from a personal loan to a guarantor where repayment can be demonstrated to come from a source other than the cash flow of the business (the salary paid to the owner by the business does not qualify). iii) Grants that do not have any conditional repayment requirements, clawbacks, or any other provision that could require the repayment of the grant during the term of the 7(a) loan. b) Limited Equity Injection Sources: The following sources, whether individually or in the aggregate, may provide no more than half of the required Equity Injection. Additional Limited Equity Sources may be used when additional funds are required to supplement the purchase when the sales price exceeds the value supported by the Business Valuation and Quality of Earnings report. In this situation, any additional funds provided must be on full standby. i) Standby Debt Agreements: (a) Debt that is on full standby (no payments of principal or interest for the term of the 7(a) loan) may be considered as equity for SBA’s purposes. Lender must use SBA Form 155 or its own equivalent Standby Agreement form, and a copy of the Note must be attached to the standby agreement and included in the credit file. (b) The standby debt may accrue interest and may be added to the standby debt and amortized after the 7(a) loan is paid in full. Standby Creditor must subordinate any lien rights in collateral securing the loan to Lender’s rights in the collateral and take no action against Borrower or any collateral securing the Standby Debt without Lender’s consent. (c) The provider of standby debt may not take an equity investment in the business. ii) Seller Debt: (a) Seller debt that is subordinated to the Lender and on full standby (no payments of principal or interest for the term of the 7(a) loan) may be considered as equity for SBA’s purposes. (b) Seller debt structured in conjunction with a 7(a) change of ownership transaction is eligible to be refinanced after it has been in place and current for 36 months. iii) Non-controlling Minority Equity Investments: (a) To be considered as eligible equity, the investment may not be subject to any agreement to repay or make distributions to recover the investment prior to release of the SBA guaranty. To qualify as a Non-controlling Minority Equity Investor, the investor must have less than 20% equity in and exert no control over the operating business. (b) The Lender must review and document the terms of all equity investments, including provisions that are realized upon the sale of the business, in their credit memorandum as part of their underwriting requirements. (c) When Equity Investments are used to meet the equity injection requirements, distributions to the investor that are not made solely for the purpose of satisfying the investor’s tax obligations attributable to the business’s income are prohibited until the 7(a) loan has been paid off. (d) Additional Equity Investments that are not used to meet the equity injection requirements, such as those providing additional liquidity, may receive standard distributions subject to any agreements of the Lender. The Lender may require inclusion of covenants such as DSC into investor agreements, or include DSC covenants into the loan agreement, to ensure that the business has sufficient cash flow to make distributions beyond tax purposes. 1. Every acquisition is now a Standard 7(a) loan. 7(a) Small loans are no longer permitted for change of ownership transactions. Even smaller deals will now go through full Standard 7(a) underwriting. This makes funding sub-500k deals even harder, because lenders no longer have an expedited, cheap way of funding these loans. 2. Your deal now has a category, and the category drives the rules. SBA has created four transaction types: Initial Acquisition (first time buyer, the default), Business Expansion (an existing business buying another in the same 4-digit NAICS), Owner Buyout, and ESOP & Cooperative. Equity, DSCR, and diligence requirements all fork based on which box your deal falls in. 3. The 10% injection splits into two buckets. Bucket 1 is what the SOP calls "Unlimited Equity Injection Sources." Word for word, these are: "Cash that is not borrowed, whether on the business's balance sheet or from other sources," "Cash that comes from a personal loan to a guarantor where repayment can be demonstrated to come from a source other than the cash flow of the business (the salary paid to the owner by the business does not qualify)," and "Grants that do not have any conditional repayment requirements, clawbacks, or any other provision that could require the repayment of the grant during the term of the 7(a) loan." There is no cap on this bucket but a minimum of 5% of the total 10% downpayment has to come from "Unlimited Equity Injection Sources." Bucket 2 is what the SOP calls "Limited Equity Injection Sources," and it covers three things: Standby Debt Agreements, Seller Debt, and Non-controlling Minority Equity Investments. The controlling sentence is this one, word for word: "The following sources, whether individually or in the aggregate, may provide no more than half of the required Equity Injection." 4. Seller standby notes, other standby debt, and money from passive investors (under 20% ownership, no control) are all "limited" sources now, and combined they can cover no more than half of the injection. Earlier summaries of 8.1 claimed first time buyers could no longer use a 5% seller standby note at all. The version we reviewed does not say that. Seller standby still can count towards the total 10% equity, it just shares the 50% cap with all the other limited sources. For seller notes specifically, the SOP says, word for word: "Seller debt that is subordinated to the Lender and on full standby (no payments of principal or interest for the term of the 7(a) loan) may be considered as equity for SBA's purposes." The 10% equity injection is still 10%. At least half of your injection must now come from "unlimited" sources: your own unborrowed cash, a personal loan you can repay outside the business, or grants with no repayment clawback. In plain terms, 5% of the total project cost must come from the loan guarantor. This is effectively putting an end to 100% of the cash or down payment coming from investors. 5. Passive investors give up distributions. If you use money from minority investors (below 20%, not guaranteeing the loan) to meet your equity injection, those investors cannot receive any distributions other than tax distributions until the SBA loan is paid in full. If their money is extra equity above the required injection, standard distributions are still allowed. Plan your investor conversations accordingly. This needs to be in your operating agreement before you go to the bank. 6. A Quality of Earnings report is required on acquisitions of $3 million or more. Most serious buyers are already doing a QofE, even on smaller deals. Banks will now underwrite both the tax returns and the QofE. The downside for buyers: you may not get to pick your provider or the scope of work, because the report must be commissioned by and prepared for the lender. It also has teeth. If the QofE earnings do not support the valuation and debt structure, the loan amount comes down. 7. DSCR requirements went up, and projections do not count anymore. Initial acquisitions and owner buyouts now require a 1.25x debt service coverage ratio based on historical (or adjusted historical) earnings, up from 1.15x. Business expansions stay at 1.15x. Banks can look at your projections, but they can no longer rely on them to meet the coverage requirement. The deal has to work on the seller's actual numbers. 8. The 25-year loan term advantage for real-estate-heavy acquisitions is going away. Previously, if real estate was more than 51% of the financing, the entire loan could potentially qualify for a 25-year term. No longer. Only the real estate portion may amortize up to 25 years. The business acquisition, working capital, and everything else gets a 10-year term. Deals can be structured as separate loans or one loan on a weighted blended maturity, but the blended payment on real-estate-heavy deals will be higher than it is today. 9. Seller transition periods may now extend up to 24 months. The maximum seller consulting period doubles from 12 months to 24. This is especially helpful in businesses where licenses are held by the seller, or where there are other critical transition issues that benefit from keeping the seller engaged longer. 10. Valuations got stricter too. Every acquisition now requires an independent business valuation from an accredited source. The old option letting lenders do their own valuation on smaller deals is gone. And total acquisition debt is capped at the valuation amount. If you are paying above the appraised value, the difference has to come from equity or funds on full standby. What to do now: If you are already working with us and have an investor-focused deal, my team will be reaching out to get your loan approved and the PLP number pulled before September 30th. If you have a deal under LOI and have not reached out to us yet, please email us immediately at redacted If you are not under LOI yet, structure your LOI with the rules above in mind. This is a developing situation. I will keep updating this thread as we learn more.