A laundromat in Tucson. An HVAC company with nine vans. A dental practice whose owner wants to retire to the coast. Every year in the United States, tens of thousands of small businesses change hands this way, and most of the buyers are ordinary people who do not have the purchase price sitting in an account.
So a bank lends it to them, and the federal government guarantees most of the loan through the SBA’s 7(a) program. The bank takes less risk, the buyer gets a shot at owning something, and a business that might otherwise have closed carries on with its staff.
The whole arrangement rests on one question, and it is harder than it sounds.
Does the business actually earn what the seller says it earns?
Almost every piece of evidence for that comes from the person being paid to leave. This is the structural oddity of acquisition lending. In ordinary business lending you lend to someone with a track record you can inspect, running a company they already run. Here both halves invert. The borrower has never operated this business. The history belongs to somebody else, who has every reason to present it well and is about to walk away with the proceeds.
SBA has watched this category grow into one of its largest, and says plainly that these transactions carry “credit risks that are not present in other segments of 7(a) lending”.[3] On October 1, 2026, it rewrote the rules.[1,2] What follows is less a compliance update than a practical lesson in how to read a company’s books.
Quick answer
On October 1, 2026, SBA moved every rule about buying a business with a 7(a) loan into a single rewritten appendix.[1,2] The centrepiece is a requirement called the Cash Proof. Before a lender can decide what a business earns, it now has to reconcile the seller’s bank statements against the income statement and the tax return, across three separate periods.[3]
Deals at or above $3 million need a full Quality of Earnings report around it. Everything is tested on history rather than projections, and the loan cannot exceed what the business is independently valued at.[3]
Key takeaways
- A business acquisition loan asks a question ordinary lending does not: is the seller’s history real, and will it survive the sale?
- SBA’s answer is the Cash Proof, which reconciles bank statements against the income statement and the tax return for three separate periods.
- Earnings are tested on what the business did, not on what anyone forecasts it will do, and the loan cannot exceed the valuation.
- Despite most published summaries, a 7(a) Small or SBA Express loan can still finance one of these deals.
Where the three profits come from
Start with the thing that makes this difficult, because it is not usually fraud. It is ordinary behaviour, and it happens in almost every deal.
A business owner filing a tax return wants profit to look modest. That is rational and legal: every deductible expense reduces the bill. The truck is on the books. So is the phone, the conference in Phoenix, and a salary for a spouse who does the invoicing. Years of that produce a return showing a business that barely clears a living.
The same owner, preparing to sell, wants profit to look substantial, because the asking price is a multiple of earnings. So those expenses come back, one at a time, as “add-backs”. The truck was a one-off. The spouse’s salary is not a cost a new owner would carry. Each adjustment may be perfectly fair. Together they can lift reported earnings by half.
One business, one year, three different profits
Annual earnings for the same fictional HVAC company, in thousands of dollars.
On the tax return
$175kEvery legitimate deduction taken. The truck, the phone, a salary for a spouse. Profit looks small, because a smaller profit is a smaller tax bill.
In the sale memorandum
$400kThe same expenses come back as add-backs: one-time costs, owner perks a buyer would not keep paying. Profit looks large, because a larger profit is a larger price.
What a lender can actually support
$305kSomewhere between the two. Finding it is the whole job, and until October it was largely left to each lender to work out alone.
Illustrative figures for one fictional business, not data. The pattern is what matters: the same year of trading produces three defensible numbers depending on who is asking.
Neither number is a lie. They answer different questions, asked by people with opposite incentives. Somewhere between them is the figure a lender should actually lend against, and finding it is the entire job. Every add-back is an argument that a cost will not recur, and nobody can prove a negative about the future.
The new rules are SBA’s attempt to stop that argument being settled by whoever is most persuasive.
The Cash Proof: stop arguing about profit, go and look at the money
The most interesting idea in the whole rewrite has a dull name. SBA calls it a Cash Proof, and it sidesteps the add-back argument entirely by going to the one record the seller did not write.
“a financial analysis that reconstructs cash receipts and disbursements by reconciling bank statement data to the income statement and tax return for each period under review”[3]
Strip out the drafting and it says: take the money that actually moved through the bank, and hold it against both of the stories told about it. The income statement shown to the buyer. The tax return filed with the government. If the business really collected what it claims, the deposits will be there.
The Cash Proof puts three records in the same room
Each one describes the same period. The exercise is finding where they disagree.
Bank statements
Written by the bank
Money that actually arrived and actually left.
Income statement
Written by the seller
What the business says it earned, and the basis for the asking price.
Tax return
Written for the IRS
The same year, filed under penalty of perjury, usually showing less.
What falls out is the point: discrepancies in income and undisclosed expenses. Deposits that never reached the income statement. Costs the seller forgot to mention. A tax return that tells a different story from the sale pitch.
Repeated for every period
SBA requires the Cash Proof inside every Quality of Earnings report, and the report itself whenever an initial acquisition or business expansion is priced at $3 million or more.
SBA is explicit about what the exercise is for. It exists to “identify discrepancies in income and undisclosed expenses”, and it has to be run over a trailing twelve months and each of the last two fiscal years.[3] Three periods, three sets of records each.
The elegance is in forcing two documents into the same room that are normally kept well apart. A seller has every incentive to show the IRS as little as possible and a buyer as much as possible. Those two numbers have always existed. Until now, nobody was formally required to lay them side by side and explain the gap.
It also catches the quieter problem, which is not overstated revenue but understated cost. Payments leaving the account that never appear as an expense. A lease nobody mentioned. The Cash Proof surfaces those because the bank statement does not care what anyone intended to disclose.
Not every deal gets one. The full Quality of Earnings report that contains the Cash Proof is required when the purchase price reaches $3 million, measured before any buyer equity or seller financing is applied, so a heavily funded deal cannot duck under the line.[3]
Who pays the appraiser decides what the appraisal asks
A business valuation sets the ceiling on the whole transaction, and the rewrite contains a small rule with a lot of worldliness in it. The valuation must be requested by and prepared for the lender, and a lender may not use one “prepared for the Applicant or the seller”.[3]
Whoever commissions a valuation chooses the question it answers. A buyer eager to close and a seller setting a price are not neutral parties, and a report written for either of them is not evidence for the bank. How much proof you need rises with the size of the cheque.
The purchase price decides how much proof you need
Three bands, and each one adds work rather than replacing it.
Up to $350,000
The lender may value the business itself
Unless the buyer and seller are closely related, in which case it goes outside regardless.
Above $350,000
An accredited outside valuer, hired by the lender
Independent of loan production, not involved in approving the deal, with no appearance of a conflict.
$3 million and above
Add a Quality of Earnings report, including the Cash Proof
Measured on the purchase price before any buyer equity, seller debt or other financing is applied.
Initial acquisitions and business expansions only. Owner buyouts and ESOP or cooperative deals skip the Quality of Earnings requirement, because the people buying already run the business.
There is one more turn of the screw, and it is the requirement most likely to change a credit team’s week. Even the independent expert gets marked.
The lender has to obtain the financial information the valuer relied on and verify it against the seller’s IRS transcripts, which are the government’s own copy of what was filed.[3] An appraisal is no longer a document you receive and put in the file. It is a document whose inputs you check against a federal record before you trust its conclusion.
You cannot lend against a forecast for a business you have never run
Lenders measure repayment capacity with debt service coverage: earnings divided by the loan payments. A ratio of 1.25 means the business throws off a quarter more cash than it needs to service the debt.
The rewrite insists this be calculated on what the business has actually done, either the last fiscal year or an average of the last two.[3] Projections do not count. The chapter that normally lets smaller loans be underwritten on a twelve-month forecast carves acquisitions out of it explicitly.[4]
That restriction is more interesting than it first appears. A forecast for a business under new ownership is a prediction about a person who has not done the job yet, usually written by people who would like the deal to close. The history is the only thing anyone can check.
Where a Quality of Earnings report exists, its normalized earnings figure becomes the number. If coverage then fails to support the price, the rule is simply that the loan comes down.[3]
Two further limits work the same way. Total debt cannot exceed the business valuation, so a buyer who agrees to overpay has to cover the difference with their own money.[3] And the buyer must put in at least ten percent, which for a first-time acquisition cannot be reduced or waived by anyone.[3]
Not every deal is treated alike
How much of this applies depends on who is buying. Someone acquiring a company they have never been part of is taking on far more unknown than a manager of twenty years buying out a departing partner, and the rules follow that logic. SBA sorts every transaction into four categories, and the most demanding one is the default: anything else has to be argued for in writing.[3]
| Category | Who is buying | Minimum DSC | Quality of Earnings |
|---|---|---|---|
| Initial Acquisition | An outsider, or someone on staff less than two years | 1.25:1 | Required at or above a $3 million purchase price |
| Business Expansion | A company buying a rival in its own industry | 1.15:1 | Required at or above a $3 million purchase price |
| Owner Buyout | Existing owners or long-serving staff buying a partner out | 1.25:1 | Not required |
| ESOP and Cooperative | The employees themselves, through a trust or co-op | 1.25:1 | Not required |
One correction, because most of the internet has this wrong
If you work in this market and take one practical thing from this piece, make it this. A great deal of the published commentary on the new rules states that SBA has barred its smaller, faster loan products from financing an acquisition. The text says otherwise:
“The use of 7(a) Small & SBA Express loans to facilitate changes of ownership are permitted but are subject to requirements outlined in this Appendix”[3]
Three things change when you use them. The lender may value the business itself at or below a $350,000 purchase price. Every coverage requirement still applies in full, with no softer standard for being a smaller loan. And the collateral test does not oblige you to count other commercial property the borrower happens to own.[4]
What this means for the people who have to do it
None of this is conceptually hard. It is hard because of volume, and because it all now happens before anyone can state a number. SBA is explicit that this diligence “is part of the primary underwriting and eligibility determination”, not paperwork gathered after a decision.[3]
In practice one acquisition file now carries two years of bank statements for every operating account, three year ends of financial statements at whatever standard the seller happened to keep them, two interim periods, the filed returns, the IRS transcripts, and a valuation whose inputs must be checked against those transcripts. Somebody has to read all of it and find the places where it disagrees with itself.
That reconciliation is what Kita was built for. Kita Capture reads the documents an acquisition file arrives with, whatever shape they are in, and catches contradictions across the file.
The AI Underwriter pulls statements, general ledgers and bank data into a normalized period-over-period spread, computes coverage, margin, debt service and trend in one pass, and drafts the credit memo with every claim cited to the line it came from. That last part matters here, because a memo about an acquisition is mostly an account of what was reconciled against what.
What it does not do is take the judgment. Kita is not an accredited valuer, does not write the Quality of Earnings report, and does not replace the independent professional who must produce it. It prepares and reconciles the file that those people and your own analyst then work from. The AI drafts and explains. A human decides, and signs.
See it on your own files
Bring a real acquisition file: the statements, the returns, the interim financials. We will show you the spread, the coverage calculation and the drafted memorandum it produces, with every figure traced back to the page it came from.
Book a demoThe order of work on an acquisition file
Useful whether or not any of it is automated. Most of the delay on these deals comes from ordering the valuation and the transcripts late, because everything downstream waits on them.
- 01
Classify the transaction before you price it
Initial Acquisition is the default. If you are calling it a Business Expansion, Owner Buyout or ESOP, the credit memorandum has to document how the applicant satisfies that category, and the type goes into the SBA Loan System.
- 02
Order the valuation yourself
It must be requested by and prepared for the lender. A valuation commissioned by the buyer or the seller cannot be used. Below a $350,000 business purchase price you may value the business in house, unless buyer and seller are closely related.
- 03
Pull the seller IRS transcripts early
You have to obtain the financial information the valuer relied on and verify it against the seller transcripts. Ordering transcripts late is the most common reason an acquisition file stalls.
- 04
Decide the Quality of Earnings question at intake
At or above a $3 million purchase price, measured before buyer equity, seller debt or other financing, an Initial Acquisition or Business Expansion needs a QoE report. Scope the Cash Proof for a trailing twelve months and the last two fiscal years.
- 05
Build the spread from the highest level of reporting available
Three most recent year ends, plus the current interim statement and the comparable interim from the prior year. Audited beats reviewed, reviewed beats compiled, compiled beats the tax return.
- 06
Calculate debt service coverage on history, not a forecast
Last fiscal year end, or the average of the last two, on a historical or adjusted basis. Where a QoE exists, its earnings figure is the one you use. Projections do not satisfy the test outside the special purpose property carve-out.
- 07
Size the loan to the lower of the valuation and what cash flow carries
Total eligible debt is capped at the business valuation amount. If coverage does not support the valuation and the proposed structure, the loan amount comes down or equity goes up.
- 08
Write the reconciliation into the memo
The add-backs, the variance between reported and normalized earnings, and the discrepancies the Cash Proof turned up all belong in the credit memorandum, with the document each one came from.
References
- [1]
SOP 50 10 8.1, Lender and Development Company Loan Programs
The operative text. Published September 25, 2026, effective October 1, 2026, replacing SOP 50 10 8. Change-of-ownership rules are in Appendix 15.
SBA SOP 50 10 8.1 - [2]
SBA Information Notice 5000-880695, Issuance of SOP 50 10 8.1
Announces the effective date and confirms that change-of-ownership rules now sit in Appendix 15. Published August 14, 2026.
SBA Notice 5000-880695 - [3]
SOP 50 10 8.1, Appendix 15: 7(a) Changes of Ownership
Transaction categories, valuation and Quality of Earnings requirements, equity injection, debt service coverage and the lender credit analysis.
Appendix 15 - [4]
SOP 50 10 8.1, Section B, Chapter 2: 7(a) Small and SBA Express
The modifications that apply when a change of ownership is financed with a 7(a) Small or SBA Express loan.
Section B, Ch. 2
Frequently asked questions
When did SOP 50 10 8.1 take effect?
October 1, 2026. It applies to every application issued an SBA loan number on or after that date. Applications submitted through September 30, 2026 stay under SOP 50 10 8.0. SBA announced it in Information Notice 5000-880695, published August 14, 2026, and published the SOP itself on September 25, 2026.
Can a 7(a) Small or SBA Express loan still finance a change of ownership?
Yes. Appendix 15 states that the use of 7(a) Small and SBA Express loans to facilitate changes of ownership are permitted, subject to the requirements in that appendix. Three modifications apply: the lender may perform an internal business valuation when the business purchase price is $350,000 or less, every Appendix 15 debt service coverage requirement still applies with no reduced standard, and the fully secured test does not require counting other commercial real estate held by the borrower or guarantors.
What is a Cash Proof under the SBA Quality of Earnings requirement?
SBA defines it as a financial analysis that reconstructs cash receipts and disbursements by reconciling bank statement data to the income statement and tax return for each period under review. Its purpose is to identify discrepancies in income and undisclosed expenses. It must cover both a trailing twelve month period and the last two fiscal years, and it must be part of every QoE report the lender obtains.
When does SBA require a Quality of Earnings report?
For Initial Acquisition and Business Expansion transactions where the purchase price is equal to or greater than $3 million, measured before buyer equity, seller debt or other financing sources are applied. Owner Buyout and ESOP and Cooperative transactions are exempt, because existing owners retain operational knowledge of the business and management does not change.
What debt service coverage does SBA require on an acquisition loan?
It depends on the transaction category: 1.25:1 for Initial Acquisition, Owner Buyout, and ESOP and Cooperative transactions, and 1.15:1 for Business Expansion. The ratio must be satisfied using either the last fiscal year end or an average of the last two fiscal year ends, on a historical or adjusted basis. Projections do not count, apart from a narrow carve-out for owner-occupied special purpose property.
What is Kita and how does it help with SBA change-of-ownership files?
Kita is an AI underwriting platform for lenders. Its AI Underwriter pulls statements, general ledgers and bank data into a normalized period-over-period spread, computes debt service coverage, margin, debt service and trend in one pass, and drafts the credit memo with every claim cited to its source line. It reads SBA 7(a) and 504 applications, SBA Form 1919, and the tax forms an acquisition file turns on, including Form 1120 and 1120-S, Schedule C, K-1s, 1065 partnership returns and quarterly 941s. The AI drafts and explains, and a human makes every decision.