Your letter of intent is signed before the lender’s credit file opens. SBA 7(a) program rules then reach back and rewrite it. Earn-outs, long seller employment terms, amortizing seller notes counted as your down payment, and retained seller governance are the usual casualties. Draft to the program rules in force when your loan is numbered.
Why does a letter of intent get signed before the lender ever reads it?
Sequence causes the problem. A letter of intent is usually signed within days of the first management meeting. The credit file opens after that, and the lender’s structural review comes later still. By then exclusivity is running, and any change the program forces looks to the seller like a buyer retrading the deal.
A letter of intent binds only what it says it binds, usually exclusivity and confidentiality rather than price. Program rules apply as of the date the loan receives an SBA loan number, not the date you signed. Everything below is stated as of September 2026: SOP 50 10 8 governs applications submitted through September 30, 2026, and SOP 50 10 8.1 governs loans numbered on or after October 1, 2026. The SOP is revised often, and by notice between editions, so confirm the operative edition and its text with your lender in writing. I read the lender’s term sheet before I mark up the letter of intent.
Can an SBA 7(a) deal include an earn-out, a revenue share, or a profit share?
No. As the program stands in September 2026, contingent payments to the seller do not work: Appendix 15 of SOP 50 10 8.1 prohibits seller earnouts, and a 7(a)-financed acquisition needs a fixed, determinable price supported by a valuation. A revenue share or profit share is the same animal in a different coat.
Under SOP 50 10 8, deferred contingent consideration is treated as purchase price, funded at closing or documented as seller debt on standby. Write one fixed price plus a seller note for what you would otherwise have risked, with a setoff right for breach that survives within the lender’s standby terms.
A holdback for defined indemnity claims turns on breach, not performance; clear the mechanic with the lender first. Representation and warranty insurance is uncommon on acquisitions this size. The loss here is yours: a conventional buyer can tell an optimistic seller to prove it and get paid, and you cannot.
The program does not let you buy the seller’s optimism on credit. Either the valuation supports the price or your own cash does.
Authority: SOP 50 10 8; SOP 50 10 8.1, Appendix 15 (7(a) Changes of Ownership).
How long can the seller stay on after closing?
SBA change-of-ownership policy caps the seller’s post-closing service role. Under SOP 50 10 8, a business may contract with the seller as a consultant for no more than 12 months including extensions. Under SOP 50 10 8.1, Appendix 15, that consulting window runs up to 24 months in the aggregate for an initial acquisition or a business expansion.
The label does not save the term. Employment, consulting, advisory, board observer: the lender reads the function, not the caption. On a complete exit the seller may not remain an officer, director, stockholder, or employee, and the longer window does not make the seller an operational decision-maker. Write the paragraph to the cap that will govern: term in months, extensions included, terminable by you, no title.
A seller who cannot accept a capped, terminable, title-free transition role is unlikely to be a seller your lender will fund. Better to learn that before exclusivity than during closing week.
Authority: SOP 50 10 8; SOP 50 10 8.1, Appendix 15.
How does the seller note have to be structured in an SBA deal?
Seller debt credited toward the buyer’s equity injection must be subordinated to the lender and on full standby, meaning no payments of principal or interest for the term of the 7(a) loan, commonly ten years on a business acquisition. Under both current editions, that standby tranche may fund no more than half the required injection.
- The standby tranche. Counts toward your injection. No principal, no interest, full term of the SBA loan, on SBA’s standby form, capped at half the requirement.
- The excess tranche. Ordinary subordinated debt, not equity. It may amortize if the lender approves, its payments enter the debt service coverage analysis, and under Appendix 15 it cannot cure a price above valuation.
Draft two notes with two sets of economics; a blended note is likely to be rewritten at closing. I ask which SOP edition the loan will be numbered under before I price either tranche.
Authority: SOP 50 10 8; SOP 50 10 8.1, Appendix 15; SBA Form 155, Standby Agreement.
How much cash must the buyer inject, and what can fund it?
A minimum equity injection of 10 percent applies to complete changes of ownership under SOP 50 10 8, measured against total project cost. SOP 50 10 8.1, Appendix 15 keeps 10 percent for an initial acquisition and does not let the lender reduce or eliminate it, while owner buyouts and business expansions can be reduced on stated conditions.
Total project cost picks up working capital, fees, and closing costs, not just the price. Appendix 15 adds other uses of proceeds to that base and, for owner buyouts, measures against the purchase agreement price. Under SOP 50 10 8, seller standby debt may fund no more than half the requirement. Under Appendix 15, that half is one shared bucket: seller standby debt, non-controlling minority investor equity, and other standby debt. The rest is unborrowed cash, or borrowed funds the lender approves.
Valuation belongs in the price paragraph. Under SOP 50 10 8 the lender must obtain an independent qualified-source valuation where the amount financed, net of appraised real estate and equipment, exceeds $250,000, or where the parties are closely related. Appendix 15 requires a lender-ordered valuation and provides that any excess of price over valuation must be made up by equity. Your cash, not the bank’s.
Authority: SOP 50 10 8; SOP 50 10 8.1, Appendix 15.
Can the seller keep a minority stake, a veto, or a right of first refusal?
In an initial acquisition the seller leaves. Under SOP 50 10 8 a seller who retains any equity is treated as retaining ownership and must personally guarantee the loan, and partial change-of-ownership deals must be structured as stock or membership interest purchases. Under SOP 50 10 8.1 a seller keeps equity only in the owner buyout category.
Both routes close on the buyer. SOP 50 10 8 states that guaranty as a minimum of two years running from final disbursement and subject to the loan’s payment status, so the release date is the lender’s to confirm, and in a partial change of ownership it reaches the other equity holders. In an owner buyout under Appendix 15, a buyer not already employed by the business may take less than 50 percent and may not become the largest owner. Take control and the seller exits.
Governance footholds are the same problem in a smaller package. A veto over budgets or hiring, a board seat, a consent right on a future sale, a right of first refusal, a repurchase option on seller-note default: each leaves the seller a say in a business you must control. Expect your lender to strike them, late, because they hide under Miscellaneous.
Authority: SOP 50 10 8; SOP 50 10 8.1, Appendix 15.
Who has to sign a personal guaranty, and can I bring in a partner?
Holders of at least a 20 percent ownership interest generally must guarantee an SBA business loan. Below that line, SBA or the lender may still require full or limited guarantees from other individuals or entities without regard to ownership percentage, when deemed necessary for credit or other reasons. Twenty percent is therefore the number that decides your cap table.
Law: 13 CFR 120.160(a).
Apply it. A partner at 25 percent signs a guaranty for the whole loan, not a quarter of it. A partner at 15 percent may be asked for a limited guaranty anyway. Appendix 15 defines a non-controlling minority equity investor as a holder of less than 20 percent, direct and indirect aggregated, who exerts no control, and caps that money as a limited source.
Ownership eligibility has moved twice in a year, so raise it before anyone is named. Effective March 1, 2026, SBA requires that 100 percent of the applicant’s direct and indirect owners be United States citizens or nationals whose principal residence is in the United States or its territories. That notice rescinded the earlier 5 percent allowance for owners residing abroad, and lawful permanent residents may no longer hold any interest. A co-investor who is not a citizen, or lives abroad, is an eligibility problem.
Authority: SBA Policy Notice 5000-876441 (published February 2, 2026, effective March 1, 2026), rescinding Procedural Notice 5000-872050; 13 CFR 120.100.
What happens if the purchase price is above the 7(a) loan ceiling?
The maximum amount of any one 7(a) loan is $5,000,000, and the aggregate SBA guaranteed portion of all loans to one borrower and its affiliates is capped at $3,750,000. A price above what the 7(a) loan can carry does not make the deal impossible. It makes the gap your problem, in cash or in approved seller debt.
Law: 13 CFR 120.151; 15 U.S.C. 636(a)(3)(A).
The answers are a larger equity check, a larger excess seller note if coverage supports it, or separate financing for owner-occupied real estate. Loan proceeds cannot outrun the supported value.
Which letter of intent paragraphs will my lender refuse, and what replaces them?
Six paragraphs cause nearly all late-stage renegotiation in 7(a)-financed acquisitions: contingent price, seller employment term, seller note schedule, injection sourcing, retained seller equity or governance, and a price above program capacity. Each has a replacement more likely to clear underwriting, and each belongs in the letter of intent rather than in an amendment.
| What the broker’s letter of intent says | Why the lender objects | What to write instead |
|---|---|---|
| “Earn-out of 20 percent of EBITDA above baseline” | Seller earnouts are prohibited; price must be fixed | Fixed price, seller note, setoff right for breach |
| “Seller employed as President for three years” | On a complete exit the seller may not remain an officer, director, stockholder, or employee | Consulting within the governing cap, no title, terminable by you |
| “Seller note, 6 percent, payments begin month 13” | A note credited toward the injection must be on full standby for the loan term | Two notes: a standby tranche, and an excess tranche that may amortize |
| “Down payment funded from investor capital” | Investor equity and standby debt share one bucket capped at half | Name the source funding the rest, with each investor, percentage, and residence |
| “Seller retains 10 percent and a board seat” | Retained equity triggers a multi-year seller guaranty; governance cuts against buyer control | One hundred percent conveyed at closing, free of retained rights |
| “Price payable in full at closing by bank financing” | The statutory ceiling and valuation cap limit what the loan carries | Price subject to lender financing and valuation, with the shortfall mechanic stated |
Which edition of the SOP applies to my deal, and when is this stated as of?
Everything above is stated as of September 2026. SOP 50 10 8 governs applications submitted through September 30, 2026. SOP 50 10 8.1, issued August 14, 2026, applies to applications receiving an SBA loan number on or after October 1, 2026, and moves change-of-ownership requirements into a dedicated Appendix 15. Confirm the operative edition in writing.
The edition sets the consulting cap, the injection base, who orders the valuation, and whether a quality of earnings report is mandatory at a business purchase price of $3 million or more. Thresholds move between editions and by notice, so treat this as a snapshot. The SOP is also a floor: your lender’s credit policy can be stricter, and its policy decides your file.
Authority: SBA Information Notice 5000-880695 (August 14, 2026); SOP 50 10, Versions 8 and 8.1.
What should I do before I sign the letter of intent?
Six steps, in order, before signature. Each is cheap now and expensive later, because every one of them becomes a renegotiation once exclusivity is running and the seller has taken the business off the market. Work them in sequence, starting with the lender, not the broker’s template.
- Get the term sheet, ask in writing which SOP edition the loan will be numbered under, and send the draft to the lender before you sign it.
- Strike every contingent price mechanic; substitute a fixed number plus a seller note with a setoff right.
- Split the seller note into standby and excess tranches, with separate economics for each.
- Write the transition role to the applicable cap in months, terminable by you, with no title.
- Check every owner’s citizenship and principal residence against the eligibility rule then in force.
- Make the price subject to the lender’s valuation, with diligence time for a quality of earnings report.
Then read it once more, looking only for retained seller rights. Board seats, consents, first refusals, repurchase options. Brokers put them last; lenders refuse them.
Keep reading
The Seller’s LibraryIf your buyer is using an SBA loan, the program has already decided several of your deal termsThe Buyer’s LibrarySBA financing rules out the earn-outThe Buyer’s LibraryThe lender’s closing checklist is not yours.
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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