What the New SBA Rules Mean for Buying and Selling a Business

Ryan Smith's podcast is aimed at people financing acquisitions, which makes it a useful place to unpack a rule change that lands squarely on them. Rob covers what is actually different, where the guidance is still unclear, and what it means in practice for an owner thinking about selling.

The business a buyer gets is not the business you are selling

Before any of the rules, there is a gap in perspective that sits underneath most difficult conversations in a sale.

An owner looks at their company and sees something stable, built over years, that has supported a family and paid for a house. A buyer looks at the same company and sees an asset that could go to zero.

Both of them are looking at something real, but there is a concrete reason the buyer is more anxious. The business they will own is carrying debt the seller never had. Once a company is financed at eighty or ninety percent leverage, a large share of its cash flow goes straight to debt service, which makes it a fundamentally different business from a working capital and cash flow point of view, even with the same sign over the door and the same people inside.

Rob says he has been explaining this to sellers more deliberately, and it lands. Once an owner understands that perhaps thirty or forty percent of cash flow is spoken for before anything else happens, the questions a buyer keeps asking start to make sense.

One related thing worth knowing: owners frequently mention that all their business comes from word of mouth, and they offer it as a strength. To a buyer it reads as the absence of a repeatable system for finding customers, and often as a sign that the referrals follow the owner personally rather than the company.

What changed on October 1

Full change of ownership

The headline change is that an SBA transaction now requires a complete change of ownership. The buyer has to acquire one hundred percent of the equity, whether the deal is structured as an asset sale or a stock sale. Partial sales, where the seller keeps a slice, no longer work the way they did.

Rob is candid that there is still a lot of confusion, including among lenders, who are themselves seeking clarity from the SBA.

The problem this creates in the trades

The change bites hardest in licensed industries, which is much of the home services sector: plumbing, roofing, construction, and others.

In those businesses, the license is usually held by the owner, and it is what allows the company to operate at all. The standard approach used to be straightforward. The buyer acquires ninety percent, the seller retains ten percent and stays on as the qualifying license holder, and once the buyer obtains their own license the seller is cashed out, or the two sell together some years later.

That route is largely closed. Rob describes a live example: a trades business where both owners want to exit completely, and where two employees are eligible to hold the license. State law would require giving the eligible employee a small equity stake, perhaps one percent, so the license can sit with them.

The complication is that SBA guidance is only half the picture. Most of the banks his team has approached will not do a ninety-nine/one or ninety/ten structure, even where the SBA position is not black and white, because each bank applies its own rules and some are stricter in order to protect the buyer. One or two will. The practical consequence is that you now have to canvass a range of lenders rather than assume a structure is available.

Investors have been pushed out

The second major shift concerns outside capital, and the SBA achieved it without an outright ban.

An investor who participates only in the equity injection cannot take any distribution while the SBA loan is outstanding. The loan term on an acquisition is ten years. In practice the average acquisition loan stays on the books around three and a half years, but an investor hearing that they cannot be paid for up to a decade will usually decline.

Combined with the earlier change removing lawful permanent residents from SBA loans regardless of their ownership percentage, the effect is that a meaningful amount of capital has left the market.

Why the SBA did it

The reasoning traces back to a model borrowed from venture lending, where a bank would finance a company on the understanding that its investors would step in if things went wrong.

That premise was applied to investor-backed acquisition deals: the operator might contribute very little equity, but the investors behind them would rescue the business if it faltered. It did not hold. Those investors were limited partners. They had not run the business, and when a deal went sideways, with contracts lost or staff gone, there was little they could do even if willing.

Rob is direct that the excesses were real, with some buyers putting down as little as two and a half percent on substantial businesses, overleveraged and overpriced. He includes his own firm in that, saying they fell prey to it on their first deal.

Default rates rose, banks closed the divisions built around that lending, and the model is, as both men put it, effectively over and unlikely to return.

Fewer buyers, but better ones

The arithmetic is not complicated. The same number of sellers still need to sell. The buyer pool has narrowed.

What remains is a smaller group who bring their own liquidity, relevant experience, and the capability to take over a business and stabilize it. Deal volume will fall. Rob's view, and he seems comfortable with it, is that the ecosystem comes out healthier: higher quality transactions and, in time, lower default rates. It makes his job harder and the deals that do happen more likely to succeed.

The quality of earnings question

With a quality of earnings report now required on SBA deals above three million dollars, there is an active debate about whether sellers should commission one before going to market rather than waiting for the buyer to do it.

The argument for it is straightforward. Without one, the buyer runs their own analysis during diligence, finds the things the seller did not know about, and the deal gets retraded late in the process, which is the worst possible moment for a difficult surprise. With one, the numbers are validated, the problems are known and fixed in advance, and the business arrives at market prepared. It is what investment banks do.

The obstacle is cost. A report might run ten, fifteen, forty thousand dollars or more, and Rob is honest that many sellers refuse outright, sometimes bluntly. He has walked owners through the full reasoning and still lost the engagement over it.

His own position is pragmatic rather than absolute. His team will judge each seller on how well they understand their accounting and how much they have researched the process, and will at minimum give a clear warning about what tends to happen without one.

Two things make the case better than theory does. A lender speaking at a recent California Association of Business Brokers conference framed it as fifteen thousand dollars well spent against six figures of avoided headaches and preserved enterprise value. And Rob's plumbing client had commissioned his own report before a previous transaction, which meant the business came to market with a complete workbook already in hand. Rob credits that with producing both more offers and faster ones.

The underlying distinction is between cost and value. The report is not an expense to minimize. It is what gives a buyer confidence that the cash flows are real.

What buyers should be ready for

Deals are harder to fund, and the variation between banks has widened.

Rob describes an e-commerce transaction where lender appetite ranged from refusing the category outright, to requiring prior e-commerce experience from the buyer, to being comfortable with it. The bank they found wanted substantially more collateral from the buyer personally, in the form of home equity or similar, because an e-commerce business offers little beyond inventory to secure against.

The practical advice: understand whether a no is an SBA rule or that particular bank's rule, because the two call for different responses. If it is the bank's, go and find another, and work with people whose job is knowing which lenders will do what.

On timing, he is blunt. Nothing closes in December, so a deal in motion now is realistically a January close. Get ahead of the items that surprise people at the end: a letter of good standing can take three or four weeks in some states, and life insurance for the buyer is another common last-minute snag. A buyer in diligence is running four workstreams at once, covering lending, operations, legal, and insurance, and anything that can be started early should be.

What a bank wants to take to its credit committee is a strong debt service coverage ratio, a buyer it has confidence in, and relevant industry experience. Where the buyer lacks that experience, bringing in a partner who has it works well. Rob mentions a buyer with a marketing background who put in an offer on a paving business on the opposite coast, with a partner in that state who came from construction. His advice was to lead with that partnership rather than hope nobody asked.

Don't overlook the landlord

A recurring deal killer that has nothing to do with the business itself.

SBA financing requires a lease long enough to support the loan, and it requires the landlord to sign a lien waiver and collateral access agreement. Landlords frequently react badly to being asked, and Rob has seen deals held hostage and lost over it. Start that conversation early, because even when everyone cooperates it can take considerably longer than it should.

Using AI without irritating your broker

Rob is enthusiastic about AI and uses it extensively, including in his firm's own systems. He is also seeing it used badly, in ways worth avoiding if you want to be taken seriously.

The most common problem is buyers who read the confidential information memorandum and then send over an enormous list of questions pitched at the wrong stage. Diligence is a distinct phase for a reason. What you need before a letter of intent is enough understanding to make an informed offer. The bank statements and detailed reports come after.

The other is using AI to negotiate agreements. He describes a seller whose accountant used it on a broker agreement, and the output pulled in terms from real estate and lending that simply did not apply. It is usually obvious, and it wastes everyone's time while someone unpicks it.

His firm has published a buyer AI communication policy, and he is matter-of-fact about the consequences of ignoring it: brokers maintain flagging and blacklist systems, and burdening a team with volume rather than substance gets noticed.

The constructive version is simple. Use AI to analyze the memorandum and to help you generate questions, then choose the handful that genuinely matter and ask those. As Rob puts it, use it to make yourself smarter rather than dumber, and remember that this remains a human business, particularly for a seller handing over their life's work.