The SBA’s new lending rulebook took effect October 1, 2026, and it tightens the terms on which buyers can use SBA financing to buy your business. It replaces the June 2025 rulebook and sorts every change of ownership into four categories: Initial Acquisition, Business Expansion, Owner Buyout, and ESOP/Cooperative. Each has its own coverage, equity, and diligence rules.
Who can buy: a narrower buyer pool
SBA loans now require that 100% of a business’s direct and indirect owners be U.S. citizens or nationals living in the United States or its territories. Green card holders can no longer own any share of an SBA-financed business.
That shrinks California’s SBA-eligible buyer pool; one adviser says the rule hits hardest in states with large permanent-resident populations (SelfEmployed.com). The test looks through holding companies and trusts to every individual behind them (CDC New England). Ask each buyer early who sits in their ownership structure. If you plan to keep a minority stake, the rule appears to apply to you too, so confirm with the lender first.
Valuation: your last year of earnings sets the price
Buyers must now show 1.25x debt service coverage, up from 1.15x, on historical earnings; projections no longer count toward the minimum (StatementsReady). Business Expansions, where an established company buys a competitor in its industry group, stay at 1.15x. Coverage uses the last fiscal year or a two-year average.
In StatementsReady’s example, a business with $400,000 of EBITDA and $340,000 of annual debt service has 1.18x coverage. That passed the old floor but fails the new one, so the loan must shrink, the buyer must add cash, or the price must fall.
Two more tests apply. Every sale needs a lender-ordered valuation. For Initial Acquisitions and Business Expansions priced at $3 million or more, the lender must also obtain a Quality of Earnings (QoE) report with a cash proof tying bank statements to your income statement and tax returns (Capital Source). It tests your add-backs, and any it rejects lower the loan the business can support, sometimes after a buyer is under contract.
Deal structure: less room for earnouts and seller paper
- Standby seller notes can count toward the buyer’s required 10% injection, but seller standby debt, other standby debt, and small minority investors together can supply at most half of it. A note not on full standby counts in debt service.
- No earnouts. Seller earnouts are prohibited; a performance rebate to the buyer is allowed only if used to pay down the loan (Innovative Business Advisors).
- Consulting after an Initial Acquisition or Business Expansion is limited to 24 months in total, up from 12, so draft transition terms to fit.
- Note refinancing requires 36 months in place and current, up from 24.
- Price above appraisal must be covered with buyer cash.
California closing issues
- Bulk sale and tax clearance. California’s Bulk Sales Law applies when a California seller’s main business is selling inventory from stock, including manufacturers and restaurants. The buyer gives notice at least 12 business days before closing, and part of the proceeds may sit in escrow until a tax clearance certificate arrives (Stimmel Law). The buyer must withhold enough to cover your unpaid state taxes (Beancount.io).
- County property tax. Some counties demand payment of unpaid unsecured personal property tax from escrow (Santa Cruz County).
- Non-competes are generally void under Business and Professions Code Section 16600 (Acquisition Stars), with an exception for sellers of a business and its goodwill, so a buyer can still ask for one. Have California counsel review its scope.
What to do now
- Test your numbers. Work out the loan your trailing earnings support at 1.25x, with every add-back documented.
- Prepare for the QoE. If the business sale price is $3 million or higher, the lender will now require a Quality of Earnings (QoE). This is a reminder to have clean books and records that can validate earnings and avoid transaction delays due to poor financial records. In many cases, it may be advisable for a Seller to hire a third party firm to conduct a QoE prior to going to market.
- Screen buyers for the citizenship rule before investing in diligence.
- Price to the new math. Plan for no earnout, and consider strategic buyers who qualify as Business Expansions.
- Clear your tax position and start early. Approvals were already running 60 to 120 days.
Sources disagree on whether the rules apply by loan-number date or by the date SBA receives the application; the September 25 update says the latter. Ask the buyer’s lender in writing. This draws on secondary summaries, not SBA documents, and is general information, not legal, tax, or financial advice.
