SBA's new lending rules, effective October 1, raise the debt-service-coverage ratio to 1.25x and require independent earnings reports for deals over $3 million. Seller notes no longer count toward down payment unless they're on full standby, which means a buyer can borrow less, potentially lowering your sale price.
If there's any chance your buyer uses an SBA loan, the rules for that loan change on October 1st. The bank now has to underwrite your actual results from the last year or two, and it can't lean on the buyer's projections to get there. Your history now sets the ceiling on what an SBA buyer can borrow to pay you. Here's what changed and five things to do about it. I'm Ed Weeks with Weeks Consulting Group. The SBA's new lender rulebook is called SOP. 5010 8.1. The final version came out September 25th. Change 1: If your buyer is taking over a company for the first time, the lender now needs debt service coverage of 1.25 times, up from 1.15. That means your earnings have to cover all the buyer's debt payments with a 25% cushion. It's measured on your last fiscal year or the average of your last 2. The lender reviews the buyer's projections but can't rely on them to hit the number. Change 2: If the purchase price is $3 million or more, the lender has to get an independent quality of earnings report. It's done for the lender, never by or for the seller. And it ties your bank deposits to your books and your tax returns. It also has to document every add-back and look at customer concentration. Change 3: Seller notes. A note only counts toward the buyer's down payment if it's on full standby, meaning no payments of principal or interest for the life of the SBA loan. A note that pays you along the way becomes more debt your earnings have to cover.
