An SBA lender sizes an acquisition loan against the lower of your purchase price and the valuation it ordered. If that valuation lands under your LOI number, the gap does not disappear. You cover it in cash, the seller carries it on a note the program will freeze, or the price comes down. Write that choice into the letter.
Why does the lender order its own business valuation, and what does it do to my price?
The business valuation in an SBA 7(a) acquisition is the lender’s document, not yours. The lender engages an independent appraiser, and the valuation sets a ceiling: pay above it and the difference has to come in as equity rather than debt. Your LOI price is an offer. The valuation decides how much of it the loan can carry.
The sequence matters. You negotiate price first. The lender orders the valuation after your application and the signed letter, by which point you are inside exclusivity and have spent money on diligence.
As of October 2026, the operative edition is SOP 50 10 8.1, effective October 1, 2026 and governing loans that receive an SBA loan number on or after that date. Earlier numbers stay under SOP 50 10 8, which let the lender value the business itself where the financed amount, net of real estate and equipment, was $250,000 or less and the parties were unrelated. Appendix 15 drops that exception. Every change of ownership takes an independent valuation.
Two consequences follow. The valuation caps total debt supporting the transaction, including seller debt not on full standby. Any excess over the valuation must be made up by equity.
Rule: SBA SOP 50 10 8.1, Appendix 15 (effective October 1, 2026); SBA Policy Notice 5000-880695; SBA Information Notice 5000-882227; SOP 50 10 8 (effective June 1, 2025).
Who is allowed to perform the SBA business valuation?
As of October 2026, the SBA requires a Qualified Source holding one of five credentials: Accredited Senior Appraiser, Certified Business Appraiser, Accredited in Business Valuation, Certified Valuation Analyst, or Business Certified Appraiser. The valuation must be requested by and prepared for the lender. A report prepared for the applicant or the seller cannot be used.
The cost may be passed to you. You may pay for a report you did not commission, addressed to someone else, and you are not the appraiser’s client. You can send documented factual errors to the lender, but reopening the number is the lender’s discretion, not your remedy.
The scope must identify an asset or stock purchase and show what the sale includes, including assumed debt. The report needs a conclusion of value, the appraiser’s qualifications, and a signature. Under the current edition, an Initial Acquisition or Business Expansion priced at $3 million or more also carries a lender-ordered quality of earnings report.
The broker’s number in the confidential information memorandum is marketing, as is the multiple the seller’s accountant quoted. Only the number the lender’s appraiser signs sizes your loan.
Rule: SBA SOP 50 10 8.1, Appendix 3 (definitions) and Appendix 15, effective October 1, 2026.
Why does the appraiser’s number come in below my model?
A valuation shortfall is usually an earnings disagreement, not a multiple disagreement. The appraiser rebuilds the earnings stream from the filed returns and the financial statements, strips adjustments that are not documented or not truly non-recurring, charges the business a market wage for the owner’s job, and discounts for risk you treated as noise.
Four things do most of the damage.
| What your model says | What the appraiser does with it | Effect on value |
|---|---|---|
| Add-backs for personal expenses, legal fees, a family member on payroll | Accepts only what is documented and genuinely non-recurring; recurring “one-time” items go back into expenses | Lowers adjusted earnings |
| Seller took $90,000 in salary, so that is the owner cost | Normalizes to what the market pays for the owner’s job, which may be more | Lowers adjusted earnings |
| One customer is 40 percent of revenue, but twelve years in | Prices the concentration as risk; the relationship may not survive the sale | Lowers the multiple |
| The owner’s relationships drive the business | Asks whether the earnings transfer to a buyer, or walk out with the seller | Lowers the multiple, sometimes severely |
Transferability is the question buyers underestimate. If earnings depend on the seller personally, the appraiser is valuing something you are not buying. That also hits your coverage test. Under SOP 50 10 8.1, as of October 2026, an Initial Acquisition is underwritten to 1.25x debt service coverage on historical or adjusted historical performance, a Business Expansion to 1.15x. Projections are reviewed but cannot meet the floor.
Rule: SBA SOP 50 10 8.1, Appendix 15 (coverage and equity), effective October 1, 2026.
The appraiser is not grading your optimism. He is pricing the business the seller actually ran.
What are my options when the valuation comes in under the LOI price?
A valuation shortfall closes three ways inside the deal: you put in more cash, the seller carries the gap on a note the SBA program will freeze, or the price comes down to the valuation. The fourth option is to walk. The lender cannot lend above the value, and the SBA requires the excess to be made up by equity.
| Route | How it works | What it costs you |
|---|---|---|
| You cover it in cash | Added equity on top of the 10 percent of total project costs an Initial Acquisition requires, which cannot be reduced | Cash you budgeted for working capital |
| Seller note for the gap | Limited sources supplementing a price above the supported value must be on full standby: no principal or interest for the term of the 7(a) loan, on SBA Form 155 or a lender equivalent | Nothing today, but the seller waits years, not quarters |
| Price reduction | Price is reset to the valuation and the loan is sized to the new number | Nothing financially. Everything politically, if the LOI did not make this the default. |
The standby point is where old templates break. Sellers hear “seller note” and picture monthly checks starting at closing. Full standby debt accrues no payments for the life of the SBA loan, the creditor subordinates its lien rights and acts only with the lender’s consent, and the provider may not take an equity stake. Interest may accrue and be amortized after the 7(a) loan is paid. Seller debt from a change of ownership can be refinanced only after 36 months current, up from 24.
Seller standby debt, other standby debt, and passive minority investor money are limited sources that together may fund no more than half of the required injection. At least half of the 10 percent must come from unlimited sources: your own funds.
Rule: SBA SOP 50 10 8.1, Appendix 15 (equity injection, limited sources, standby debt); SBA Form 155 (Standby Agreement).
A gap note is not seller financing. It is the seller agreeing to be paid after the bank is.
What should the LOI say about the lender’s valuation?
The letter of intent should state that the price is subject to the business valuation the SBA lender is required to obtain, and name what happens if the valuation comes in low. Naming the mechanic converts a mid-exclusivity retrade into the operation of a term both sides already signed. Silence hands the seller the stronger position.
I ask the lender how it will size this loan before I mark up the letter, and I read the equity and standby terms before the seller’s price.
A workable paragraph does four things:
- States the dependency. The price assumes the lender’s valuation supports it and that the deal is 7(a)-financed.
- Names the default. If the valuation is below the price, the price drops to the valuation unless you elect otherwise in writing within a stated number of days of receiving the report.
- Lists your elections. Cover the shortfall in cash, or take it as seller debt meeting the SBA’s standby requirements, with the seller’s written agreement.
- Gives you an exit. If no mechanic is agreed in the window, either party may terminate, subject to the provisions the letter says survive.
One drafting warning. Most of an LOI is non-binding, but exclusivity, confidentiality, and expense provisions usually are, and which parts bind turns on your words and the governing law. A valuation paragraph in the non-binding section still sets an expectation the seller signed. Do not assume a court enforces it as a price term.
What if the deal includes the building?
Real property brings a separate appraisal and a separate environmental investigation, and a low real estate appraisal pulls the same loan number down. As of October 2026, a lender-ordered appraisal by a state certified appraiser is the expectation once the property’s value runs above $500,000; at or below that, the lender may use an evaluation.
That threshold is not one rule. The banking agencies set it for the lenders they supervise, the SBA sets its own in the SOP for every 7(a) lender including non-bank lenders, and the SBA may require professional appraisals as a loan condition. Ask which standard your lender applies, and confirm the figure.
The environmental side is a timing risk until it is not. SBA procedures screen current and prior uses against a NAICS list of sensitive industries. Below a $250,000 loan threshold a questionnaire may suffice; above it, the questionnaire plus a Records Search with Risk Assessment. A match on a sensitive use, such as a fueling site or an on-site dry cleaner, generally starts you at a Phase I, and elevated findings push further. Reports go stale under the all appropriate inquiries timing rules, and reliance has to run to the lender.
Treat the real estate as its own deal with its own gap; a low appraisal lands on the same equity line.
Rule: 13 C.F.R. 120.160(b); 12 C.F.R. 34.43(a)(13), (b), (c) (OCC lenders; parallel agency rules elsewhere); 40 C.F.R. 312.20, 312.26; SBA SOP 50 10 8.1, environmental procedures (October 2026).
How do I know these rules will still apply when my loan closes?
SBA requirements here are stated as of October 2026, under SOP 50 10 8.1. The SOP changes often, and a lender applies the version in force when the loan receives its SBA loan number, not the version in force when you signed the LOI. Confirm the operative edition with your lender in writing.
The recent record shows why. SOP 50 10 8 took effect June 1, 2025. A procedural notice changed citizenship and residency eligibility effective March 1, 2026. SOP 50 10 8.1 was announced in August 2026, reissued with technical updates in September, and effective October 1, 2026.
Ask the lender which edition governs this loan and what the valuation and equity requirements are under it. Keep the answers.
Rule: SBA Policy Notice 5000-880695 (August 14, 2026); SBA Information Notice 5000-882227 (September 25, 2026); SBA Procedural Notice 5000-876626 (effective March 1, 2026).
What does a valuation contingency cost me with the seller?
A valuation contingency is a walk right, and sellers and brokers price walk rights. Expect your offer to score lower against a competing letter that does not carry one. That is a real cost. You are trading some chance of winning the deal for protection you need if the number lands short.
Two things blunt it. The valuation happens either way, because it is the lender’s requirement, not an option you chose; what you negotiate is who absorbs a shortfall. And a clause with a stated default and a short election window reads as a buyer who has done this before, where “subject to satisfactory valuation” reads as a right to renegotiate at will.
Holders of at least a 20 percent ownership interest generally must guarantee the loan, and a lender can ask for more. Every dollar of price you fail to support with value is a dollar of personal exposure for an asset the appraiser did not think was there.
Rule: 13 C.F.R. 120.160(a).
What should you do before you send the LOI?
Before the letter goes out, pressure-test the price against the way the loan will be sized, not against the broker’s asking multiple. The work is yours, not the lender’s, and it is cheaper now than it is inside exclusivity. Four steps, in order, each producing a number you can defend.
- Rebuild the earnings yourself. Strip every add-back you cannot document with an invoice or a return. Charge a market salary for the owner’s job. Run debt service against that number at your category’s coverage floor.
- Ask the sizing questions in writing. Which SOP edition governs. What injection your category requires. How much can come from limited sources. When the valuation is ordered and who gets it.
- Price the gap early. Decide how much cash you would add if the valuation came in five or ten percent light, and whether you would rather cut price.
- Put the mechanic in the letter. Dependency, default price reduction, your elections, exit if nothing is agreed, the report delivery deadline, and your right to a copy.
Talk to the seller about standby before anyone writes a gap note. A seller who understands that it pays nothing until the SBA loan is retired may take the price reduction instead.
Keep reading
The Buyer’s LibraryThe lender’s valuation can come in under your priceThe Buyer’s LibraryYour exclusivity period runs on your lender’s clock.The Seller’s LibraryThe price cut that arrives two weeks before closing, and what you can do about it in the LOI
Have a lawyer read it before you sign.
A purchase is decided in a handful of documents you sign exactly once — the letter of intent, the note, the indemnity. There is a right time to have them read, and it is before the lender sets your closing date.
Before founding Prencipe International, Joe practiced at the top law firms in the world, including Freshfields Bruckhaus Deringer, Baker McKenzie, Morgan Lewis & Bockius, and served at the U.S. Securities and Exchange Commission. He has spent his career on high-stakes disputes and transactions for businesses that cannot afford to lose. He represents buyers acquiring SBA 7(a)-financed businesses -- reading the letter of intent before it is signed, and the purchase agreement while there is still room to change it.
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