Part 3 of 3: Selling to an SBA Buyer After October 1? What Sellers Should Do Before the LOI
Every challenge that the new SBA 7(a) rules can create for a seller is easier to solve before an LOI than after one. The work is the same. The leverage isn’t.
Part 1 covered what changes on October 1. Part 2 covered the lender-ordered quality of earnings (QoE) report and what it examines. This one is about what to do with that information while you still have options.
I want to be clear about something first. Nothing in the new SOP changes what makes a business sellable. Clean records, defensible earnings, and revenue that survives your departure mattered in 2024, and they’ll matter in 2030. What changed is who checks, when they check, and what it costs you if they find something you have not already found yourself.
Find Out How Your Buyer Plans to Pay Before You Pick One
Most owners treat financing as the buyer’s problem until it becomes theirs.
The sequence usually runs as follows:
pick the buyer
negotiate the price
sign the letter of intent (LOI)
then find out what the lender thinks.
Now, reverse that. When a buyer comes to the table, the financing question belongs in the first serious conversation, not the fifth.
Are they using SBA financing?
Which lender, and have they talked to that lender about this specific transaction?
Is this their first acquisition, or do they already operate a business in your industry?
That last question isn’t idle curiosity. Under the new framework, a first-time buyer and an existing operator in your four-digit NAICS group face different coverage floors, equity requirements, and underwriting requirements. The category your buyer falls into shapes what they can afford to pay you.
A buyer who can’t answer these questions clearly is telling you something useful.
Four Records Get Reconciled. Cash Proof Adds the Fifth Check.
The QoE reconciliation expressly covers four sources:
your accountant-prepared financial statements
your tax returns
your internal financials
your IRS transcript data
Bank statements come in through the separate Cash Proof requirement.
Together, those records still have to tell one consistent story.
Don’t wait for a lender to spot the gaps. Pull these records yourself, lay them out side by side, and see where things don’t match up. Some differences are quick fixes. Others might take a call with your accountant and a few hours digging into the ledger.
The issues you can solve in an afternoon now can often drag out for weeks once you’re under exclusivity, with a buyer checking in daily and a lender waiting for answers. That’s why I always push for clean financials early. The new rules just mean there’s now someone else who has to check.
Build an Add-Back File, Not an Add-Back Spreadsheet
Many sellers arrive at market with an add-back schedule. A list of adjustments, each with a number next to it, prepared by a bookkeeper or an advisor in an afternoon.
But that’s not enough anymore. What matters now is the file behind it.
Every adjustment on your schedule needs backup: the invoice, the settlement agreement, board minutes, a lease comp, or the engagement letter showing the project ended. You want enough there that someone who’s never met you can look at the paperwork and understand exactly why that line belongs.
I have written at length about the add-backs that buyers reject, and the logic remains unchanged. What has changed is the audience. A buyer challenging your add-back is negotiating with you, and negotiation leaves room for explanation. A lender applying the new requirement is complying with a federal procedure. The documentation either exists or it doesn’t.
Here’s a good test: if you had to hand this to a stranger tomorrow, with no chance to explain, would the paperwork alone make your case?
What to do now: Go through your add-back schedule line by line and put the supporting document next to each one. Every line without a document is either a line to remove or a document to go find. |
Thirty-Six Months of Bank Statements, Organized and Reachable
The required report includes a Cash Proof that reconciles bank statement data against the income statement and the tax return, covering the trailing twelve months and each of the last two fiscal years.
That’s three years of banking activity, so pull three years of statements. Every operating account, every account the business touches, including the one you opened for a project that ended and never closed. Get them into one organized place, indexed by account and period.
While you’re at it, look for anything that might raise questions. Deposits that don’t match an invoice. Transfers between entities. That year you put in personal funds to cover a gap. The customer who paid you directly, rather than through the usual process. Most of this isn’t improper, but every one of these items needs an explanation. It’s much easier to pull those details together now, while you still remember what happened.
Your Revenue Gets Examined, Not Just Your Expenses
Sellers preparing for financial diligence almost always prepare the expense side. The report also has to assess the quality and sustainability of your revenue base: customer concentration, contract continuity, and whether existing revenue and margins are likely to hold after the sale.
Get ahead of this. Before you go to market, make sure you know the answers to these questions:
What share of revenue and of gross margin sits with your top customer, and your top five?
Which contracts contain change-of-control or assignment provisions, and what do they require?
Which agreements come up for renewal inside the next eighteen months?
What does your margin trend look like over three years, and can you explain every move in it?
What is in the backlog, and how much of it depends on you personally?
Was there revenue in the last three years that will not repeat?
None of these questions are meant to trip you up. Any careful buyer will ask them. The difference now is that a lender has to ask too, and your answers end up in a lender-controlled report you may not receive.
A Rehearsal You Can Run Yourself
You can’t commission the lender’s report. It has to be independent and prepared for the lender’s benefit, and a seller-commissioned report does not satisfy the requirement. Anyone who tells you otherwise is selling something.
What you can do is run the same drill on your own terms, before you go to market. A sell-side QoE review puts a professional through your records, asking the same questions the lender’s provider will. The difference is, you get the answers early—when fixing a problem is still cheap.
The value isn’t the report. It’s the timing. An unsupported add-back found in February is a line you remove or a document you locate. The same add-back found in October, with a signed LOI and a buyer in exclusivity, is leverage for a retrade. A reconciliation gap found early is an afternoon with your accountant. Found late, it is a financing delay with a closing date attached.
For larger deals where SBA-backed buyers are likely, this extra step is worth the investment. For smaller deals, a thorough readiness review with your advisor may be enough. This isn’t a one-size-fits-all rule. It’s a judgment call, and it’s worth talking through with someone who knows your business.
Do Not Market a Number You Will Have to Walk Back
Every seller feels the urge to show the highest possible earnings in the confidential information memo (CIM). A bigger number brings more buyers and justifies a higher asking price. That temptation is built into the process, but it’s a trap.
Now, an aggressive adjusted EBITDA has to clear two hurdles: the buyer’s diligence, as always, and a lender-ordered analysis that decides how much debt the deal can support. If the number you marketed doesn’t hold up, you’re not just negotiating a lower price. You’re explaining the gap, and that costs you credibility on everything else you’ve shown.
A number you can defend from start to finish is worth more than a big number that gets cut down in month four. That’s a core argument in Sweat Equity Payday, and the new rules make it even more true.
Put the Diligence in Your Timeline Before Someone Else Puts It There
A lender-ordered QoE report takes time to scope, engage, and complete, and it’s now sitting inside your LOI-to-close window on covered transactions.
Plan for that when you negotiate the LOI, instead of being surprised six weeks in. Ask the buyer and their lender up front: how long will financial diligence take, who’s doing it, and when will they start? A realistic timeline protects you. The alternative is sitting in exclusivity while everyone waits on a report that nobody scheduled.
Have the buyer coordinate provider selection and engagement with the lender. From the seller’s side, confirm that the required work has been formally engaged, understand the document request and timetable, and do not assume that a buyer- or seller-commissioned report will qualify.
There are two structural points to keep in mind:
First, if the price exceeds what the valuation, QoE, and proposed debt structure support, the gap may require additional buyer equity, a lower price, or another permitted structure. Debt used as an eligible equity source may have to remain on full standby—no principal or interest payments during the SBA loan term.
Second, seller earnouts aren’t allowed on SBA change-of-ownership deals, though buyer rebates tied to performance are permitted and must be applied to principal on the SBA loan. If you were planning to use either of these, find out early.
What to do now: Before you sign, ask the buyer’s lender three questions in writing. How long will financial diligence take, who will perform it, and when will they be engaged? |
Before You Sign: The Short Version
Buyer's financing path | SBA or not, which lender, whether they've discussed this specific deal, whether they already operate in your NAICS group |
Your business purchase price | Purchase-agreement price less appraised owner-occupied real estate. If the transaction is approaching the $3 million threshold, prepare early. |
Four records reconciled | Accountant-prepared statements, tax returns, internal financials, IRS transcripts — differences identified and explained |
Thirty-six months of bank statements | Every account, indexed by account and period, unusual items explained |
Add-back file | A supporting document behind every line on the schedule |
Revenue answers | Concentration, change-of-control provisions, renewals inside eighteen months, three-year margin trend, backlog dependency, non-repeating revenue |
Diligence timeline | How long, who performs it, when they're engaged — in writing, before the LOI |
Structure constraints | A gap above what the valuation, QoE, and proposed debt structure support may require additional buyer equity, a lower price, or another permitted structure; debt used as an eligible equity source may require full standby; no seller earnouts; permitted performance-based buyer rebates must be applied to SBA loan principal. |
None of this requires a perfect business. It requires a business whose numbers you can explain before someone else asks.
Financial Preparation Is Deal Preparation
The owners who will do well under these rules are the same owners who did well before them: the ones whose records match, whose adjustments are documented, and whose revenue does not depend entirely on the person leaving. The rules didn’t raise that bar. They just made it harder to get to closing without clearing it.
Everything on this list is work you can tackle while you’re still running your company, on your own timeline, with no one looking over your shoulder. That’s the advantage. Once you sign an LOI, every one of these tasks becomes something you’re doing under pressure, with your leverage gone. That’s why deals fall apart before closing and why prices get renegotiated during diligence.
At HartmannRhodes, I work with owners of lower-middle-market companies across the country on exactly this: getting the financial record ready before somebody else tests it, qualifying buyers before they have leverage, and running a process where problems surface while they’re still cheap to solve.
You’ve spent decades building this business. Give yourself the time it takes to prove what it’s worth.
You only sell your business once. Make it count.
If you’re thinking about a sale in the next few years and want to know where your preparation actually stands, schedule a confidential discovery conversation.
Common Questions About Preparing for an SBA-Financed Sale:1) How far ahead should I start preparing? Two to three years is the standard answer for financial cleanup, and it holds. Buyers and lenders look at trailing financials, so whatever you want them to see has to already be in the record. For the specific items in this article, reconciliation and documentation, six months of focused work before going to market makes a real difference. 2) How do I know whether my transaction will be covered by the quality of earnings requirement? It applies to SBA 7(a) initial acquisitions and business expansions where the SBA-defined Business Purchase Price is $3 million or more. Owner buyouts and ESOP or Cooperative transactions are outside the mandate, though a lender can order a report on any deal under its own credit policy. The $3 million figure is the purchase-agreement price less the appraised value of any owner-occupied commercial real estate in the deal. Run the calculation on your expected price before you go to market. 3) Will a quality of earnings review I commission satisfy the SBA requirement? No. The required report has to be independent and prepared for the lender’s benefit, not by or for the seller or the borrower. A sell-side review is preparation, not substitution. 4) How many years of bank statements should I have ready? At least thirty-six months, for every account the business uses. The required Cash Proof covers the trailing twelve months and each of the last two fiscal years. 5) What is the difference between an add-back schedule and an add-back file? The schedule is the list of adjustments and their amounts. The file is the supporting documentation behind each one. Under the new requirement, the schedule is a starting point, and the file determines whether an adjustment survives. 6) Should I avoid SBA-financed buyers? No. SBA financing is an important financing path for many individual and small-business acquirers, and excluding SBA-financed buyers can narrow your market. The point is to understand the underwriting path before you commit to a deal that depends on it. 7) What if I am already in a process right now? Find out where the loan application stands and when the lender expects to receive an SBA loan number. Applications that receive a number on or after October 1 are underwritten under the new rules regardless of when they were submitted. If that is your situation, ask the lender to run the coverage test at the applicable floor and confirm whether a report will be required. |
The SBA can issue additional guidance, and individual lenders may apply their own underwriting overlays in addition to SBA minimum requirements. Confirm transaction-specific requirements with the lender and with your accounting, legal, and transaction advisors.
Primary sources: [SBA Information Notice 5000-880695](https://legacy.sba.gov/document/information-notice-5000-880695-issuance-sop-50-10-81) and [SOP 50 10 8.1](https://legacy.sba.gov/document/sop-50-10-lender-development-company-loan-programs), Appendix 15.
Mark Hartmann is a former business owner turned M&A advisor—and the author of Sweat Equity Payday—who knows firsthand what it takes to build, grow, and sell a successful company. A three-time Inc. 5000 CEO honoree, he led his own eight-figure sale and now helps business owners sell companies worth $1M to $25M. Mark understands that selling a business is personal, not just financial. That’s why he works closely with owners to maximize value, protect their legacy, and transition on their terms.
He holds an MBA from Eastern University and a master's degree in organizational change management from St. Elizabeth University, as well as Certified M&A Professional (CM&AP), Certified Business Intermediary (CBI), Certified Exit Planning Advisor (CEPA), and Certified Value Builder (CVB) credentials.
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HartmannRhodes advises owners of companies typically valued between $1–$25 million. If you’d like a structured pre-sale valuation review and a readiness roadmap, we can walk you through the process and tailor it to your timeline and goals. Contact us today!
Blog: Part 3 of 3: Selling to an SBA Buyer After October 1? What Sellers Should Do Before the LOI