On October 1, The Asking Price Gets A Referee

What Actually Changed

On August 14 the SBA published SOP 50 10 8.1, the rulebook that replaces the one in force since June of last year. It applies to any application that receives an SBA loan number on or after October 1. Applications that get a number through September 30 stay under the current rules. The agency posts the current and pending versions on its lender resources page.

Most of the document carries forward untouched. The rework lands almost entirely on one activity: buying a business.

Five things change for a change-of-ownership deal.

Every purchase now needs an independent business valuation from an accredited source. Smaller deals could previously lean on the lender's own internal number. That option is gone.

Deals priced at $3 million or more, excluding real estate, add a Quality of Earnings report on top of the valuation. The lender orders it. It reconciles the seller's books against bank statements and tax filings, and the earnings figure it produces is the one that drives the coverage math. Not the seller's add-back spreadsheet.

Post-closing projections can be reviewed. They cannot be used to meet the coverage standard. The deal has to work on what the business actually did.

The coverage floor for a first-time acquisition and for an owner buyout rises to 1.25x from 1.15x. Expansions stay at 1.15x.

And change-of-ownership deals can no longer run through the streamlined small-loan path at any size. Full underwriting, every time.

The Coverage Floor Went Up. It Still Is Not High Enough.

1.25x sounds like a real standard until you do the arithmetic on it.

A business covering its debt at 1.25 times generates $1.25 for every dollar it owes the bank. That leaves twenty-five cents of margin. One slow quarter, one truck that has to be replaced, one customer who leaves, and the twenty-five cents is gone.

The Bulletproof floor is 2.0x, and it gets measured after a 20% revenue decline. That is a different question. The SBA is asking whether the business can pay the bank in a normal year. I am asking whether it can pay the bank in a bad one and still leave you something to live on.

So for you, the coverage change is not the news. If your deals are already clearing 2.0x stressed, 1.25x unstressed is not the bar that stops you. Timeline and paperwork are.

Here is the thing nobody mentions when a rule tightens. The buyers who complain loudest about stricter underwriting are usually the ones whose deals only penciled at the loose standard. If the only reason a deal worked was that a lender was willing to count a projection, the deal was never real.

The rule change did not break your deal. It found it.

You can run anything you are looking at through the calculator at DealScore Pro and see your stressed coverage in about sixty seconds. If it clears 2.0x, October 1 is a scheduling problem for you, not a math problem.

The Valuation Requirement Is The Best Thing In The Document

Most of what has been written about this SOP treats the independent valuation as friction. It is the opposite. It is the most useful thing the agency has handed buyers in years.

Think about what it actually does. A seller picks a number. The broker builds a story around the number. You show up and negotiate against the number with nothing on your side of the table except your own analysis and whatever nerve you brought that day.

Starting October 1, an accredited third party who does not work for the seller and does not work for you puts a number on the business. If the price sits above that number, the gap does not get financed. It comes out of your down payment.

That changes the negotiation completely. You are no longer the only person in the room saying the price is too high. The lender's file says it too, in writing, and the seller's deal cannot close until somebody solves the gap.

I had a buyer walk me through a deal last quarter where the seller's price was built almost entirely on a projection about a contract that had not been signed. He wanted to know how to argue against it without blowing up the relationship. Under the new rules he would not have to argue at all. The valuation does it for him, and nobody has to lose face.

There is a seller-side consequence worth understanding, because it will shape what you see listed this fall. An overpriced business that could previously find a buyer willing to stretch now needs a buyer with cash on top of the stretch. That pool is much smaller. Expect asking prices on the weaker listings to soften between now and the end of the year, and expect the good ones to hold firm, because they will appraise.

What To Do With The Next 26 Days

Two situations, two different moves.

If you are already in underwriting, your entire job is the SBA loan number. Approval on a complete package runs 30 to 90 days depending on the lender, so call yours this week and ask two questions. What is the realistic date this gets an SBA number, and what is still missing from the file. Anything you can hand them today is a day off the clock.

If you have not found a deal yet, stop trying to beat the date. You are not going to source, diligence, and paper an acquisition in twenty-six days, and rushing a purchase to catch a rule change is how people end up owning the wrong business. Underwrite to the new standard instead. Assume the outside valuation. Assume the 1.25x. Assume no projection counts. If a deal only works when you relax one of those, it was not going to survive its first year anyway.

One piece of housekeeping most people are going to miss. The new SOP broadens the definition of a key employee to include anyone holding the experience, qualification, or license the business operates under, and it says a seller cannot remain a key employee after a full sale. If the seller personally holds the license, that has to be solved before closing, not after. That one is going to blow up somebody's deal this fall, and it will not surprise anyone who read the document.

After 35 years of looking at these, every tightening cycle sorts buyers into the same two groups. The ones who wanted the loose rules because the loose rules were carrying the deal. And the ones who barely notice, because they were already underwriting harder than the bank was.

Underwrite to the standard that has not been published yet, and the published one never surprises you.

The second group buys better businesses. That has been true every single time.

What This Means For You

If your deal is in underwriting, call your lender this week and ask for the realistic date it receives an SBA loan number. If you are still hunting, underwrite every deal to the October standard starting today so that nothing about your process has to change on October 1.

The rules move. The method does not. If you want the whole framework I use to run a deal before a lender ever sees it, watch the free 28-minute masterclass.

Mike

Want to see how I stress-test every deal against cost shocks, revenue dips, and hidden liabilities before I'd put a dollar at risk? I walk through the entire Bulletproof method in a free 28-minute masterclass.

Forward this email. Tell them to grab Mike's free book - Real Estate Is for Suckers: Buy a Business Instead. Same framework Mike uses to stress-test every deal.