Two weeks ago, the Small Business Administration changed what a buyer can finance when they buy a company like yours. The rules took effect October 1. If you own a manufacturing, distribution, or trade-services business in the $2M to $50M range, the numbers in those rules now sit between you and your eventual price.
This matters even if you never plan to sell. Most owners reading this are not selling soon. The point is what the new rulebook says a business is worth on paper, and why the paper is now written by someone who has never met you.
The coverage ratio moved
For most acquisition loans and owner buyouts, the buyer's earnings must now cover the post-closing debt by 1.25 times, up from 1.15x. That covers loans issued on or after October 1 under SOP 50 10 8.1.
A tenth of a point sounds small. It is not. Coverage is measured on the seller's trailing cash flow, not on what the buyer hopes the business will become. When the required coverage moves from 1.15 to 1.25, every dollar of noise in your books costs the buyer more borrowing capacity. Take a business that throws off $500,000 of documented cash flow. On a 10-year SBA loan at today's rates, that supported roughly $2.7 million of debt at 1.15x. At 1.25x, the same cash flow supports roughly $2.5 million. That is about 8 percent less borrowing capacity on the same business, on every deal. The buyer's maximum offer moves down by roughly the difference, or the buyer has to bring more cash to the table to hold the price.
Either way, the seller absorbs it. The price did not get renegotiated in a room. It got repriced in an underwriting file.
Projections are out, QoE is in
Under the old rules, a buyer with a confident plan could lean on projections to bridge a thin history. The new SOP closes that door: projections generally cannot make up for a shortfall in historical cash flow.
When a buyer is acquiring a company for $3 million or more, not counting owner-occupied real estate, the lender now orders an independent Quality of Earnings report. A third party reads your books before the loan moves. Owner compensation decisions, personal expenses run through the company, revenue that exists because you personally hold the relationships. All of it gets found, adjusted, and priced.
Here is the uncomfortable part. The seller who does not know their own QoE-grade numbers before the process starts is negotiating against a buyer who does.
A business whose earnings are documented, recurring, and not dependent on the owner pencils cleanly at the new ratios. A business with noise in the books forces price cuts, bigger equity checks, or both. The lender's underwriting file has become the most honest valuation conversation an owner will ever be part of, and it happens on the buyer's side of the table.
Which raises the question every owner at that price range should answer early: should you order your own QoE first? The rule does not require it. The economics do. The lender's report examines owner compensation, discretionary expenses, EBITDA add-backs, and related-party transactions. The first time a seller sees those adjustments should not be inside a live negotiation. At that point the buyer's team has read the report and you are arguing about price against a document you have never seen. Every adjustment is either defensible or it is a price cut, and the seller who finds that out in month two of diligence has no time left to fix the fixable ones or document the defensible ones. The seller who commissioned a sell-side QoE six months out knows their adjusted number, knows which add-backs survive scrutiny, and can walk into the negotiation with evidence instead of surprise. One caution: the lender will not accept a seller-prepared report in place of its own. Your QoE is preparation, not a substitute. Its job is to make sure nothing in the lender's report surprises you. For deals at this range, the sell-side QoE is becoming what staging is to selling a house: a normal cost of exit readiness.
One more distinction the new rules draw, and it matters to who shows up for your business. The 1.25x ratio applies to initial acquisitions, a new buyer buying the company. An established company buying a competitor within the same four-digit NAICS industry group can keep the 1.15x ratio, with more flexibility on the buyer's equity injection. That means an individual entrepreneur and an established competitor can look at exactly the same business and arrive with different financing. The practical version for you: knowing what your business is worth is only half of it. You also want to know who your likely buyer is and how that buyer will finance the deal, because the two buyer types now bring different rulebooks to the same table.
Your exit terms changed while you weren't looking
The new rulebook also reshaped the transition itself. A seller can stay on as a consultant for up to 24 months, doubled from 12. But the structure assumes a clean handoff: in a full sale, the buyer's lender is pricing the assumption that you leave, and the business has to stand on its own when you do.
Seller notes got their own rules. A seller note on standby covers at most half of the required equity injection. A seller note being refinanced must be seasoned for 36 months, up from 24. If your exit vision includes carrying paper and rolling some of your proceeds, the structure available to you just narrowed.
None of these rules care when you plan to exit. They apply to the buyer who shows up unsolicited in March as much as the sale you plan for 2030. The transition you want to run has to fit inside a structure that now exists whether you like it or not. The owner who structures nothing still gets a structure: the default one.
One page a month, twelve by year-end
Everything this newsletter has argued this week points at the same place. Monday's post made the case that exit planning is a Tuesday habit. Wednesday's poll asked where your key processes live. The answer that matters now is the one an underwriter can read.
The mechanics are unchanged. One process a month, written down: the quoting rules, the payroll handoff, the customer notes. Who does what, decided by what rule, while you are still around to answer. Twelve pages by December.
The difference is that this used to be a valuation argument. It is now a financing requirement. A business that runs on documented, owner-independent process is worth more to a buyer, and it is increasingly the only kind a first-time buyer can get funded to buy at the new ratios. Transferability stopped being a nice-to-have the day the coverage floor moved.
There is a favorable side to the SOP worth knowing: zero upfront guaranty fee on 7(a) loans of $700,000 or less for manufacturers and food-supply-chain businesses through fiscal 2027. For a smaller manufacturing owner weighing an internal sale to a key employee or a family buyout, the financing just got cheaper at exactly the moment the underwriting got stricter. The buyers who remain will be the disciplined ones. That is good news if you are ready for them.
What you should have checked
The title of this piece is the point. Every owner believes their business is worth what the market will pay. The new rules say the buyer's lender checks that belief against a file, and the file is built from your trailing numbers and your documented process. The check you skipped is the one the lender now runs for them.
One page a month is how you get ahead of it. The process that generated the most questions since the last one. Write it down while you are still the one who knows the answer.
If you want to see what an underwriter is likely to discount before one does, start with the risk discounts already sitting in your business. If you would like to get a QoE, contact me.
Steve Duke spent about 30 years learning both sides of this problem. In his corporate career, he worked for Fortune 100 aerospace companies, including GE Aerospace, Lockheed Martin, and General Dynamics. At one of these companies, he ran a multimillion-dollar business unit with full P&L responsibility. He then left to run his own company and discovered that decades of training don't protect you from becoming the business yourself. A serious health event ended it. He exited, recovered, and built Lucensys™ Group around one idea: every owner exits eventually, and the only question that matters is whether they built something that can fund what comes next.
He wrote Failure to Exit about why most owners arrive unprepared.
His next book carries an old warning for owners: the best time to plant the tree was 20 years ago. The second best time is now.
Lucensys™ Group works with owner-operated manufacturers, distributors, and industrial-services companies doing $2M–$50M, reducing owner dependence and the risk discounts that cost owners at the table.
Charlotte, NC · steve@lucensys.io · lucensys.io · (704) 953-5608