Updated October 23, 2026
Adam Hoeksema
Updated October 2026 for SBA SOP 50 10 8.1, which took effect October 1, 2026 and changed how SBA acquisitions are valued and underwritten.
If you are looking to buy a small business with an SBA loan I think there is some very simple due diligence that you should do before you submit a letter of intent (LOI) to purchase the business that could save you hours of time and thousands of dollars. We offer a service to buyers that we call a Quality of Earnings “Sniff Test” where we provide this pre LOI due diligence for buyers, but there isn’t any reason that you couldn’t do this due diligence and analysis yourself. Let me outline the 4 core things that I think should be your first step of due diligence when looking to buy a business with an SBA loan:
- Do the Seller’s Financials have any Major Red Flags?
- Is the Valuation of the Business Reasonable?
- Will the Deal Qualify for an SBA Loan?
- Can You Meet the Equity Injection?
Let me dive into how I would analyze the business and answer these questions.
Small Business Acquisition Financial Due Diligence Red Flags
When I analyze a small business for sale I start by asking for the last 3 years of business tax returns. For most small businesses, the tax returns are what an SBA lender will use to underwrite the deal, so you might as well look at the same thing the lender will. (Lenders are now required to use the highest quality statements available, so if the business has audited, reviewed or compiled financial statements, the lender will use those instead.) Ask for year-to-date statements too, along with the same period from the prior year so you can compare them.
Then you will need to get those 3 years of tax returns into a spreadsheet where you can see the years side by side and notice any trends. Our free Acquisition Financial Projection Template is set up for exactly this, and it will carry the numbers through to a debt service coverage calculation.
- Are sales going up or down?
- Are gross profit margins and net profit margins going up or down?
- Are the expenses and margins similar to industry averages?
- Are there any add backs and are they reasonable and will the SBA allow them?
With the tax return data entered along with any proposed add backs by the seller you should be able to calculate the Seller’s Discretionary Earnings (SDE). Our free SDE calculator can help.
With the SDE in hand, next we need to look at the valuation.
Small Business Valuations and SBA Acquisition Loans
Small businesses are typically valued based on a multiple of their Seller’s Discretionary Earnings (SDE). To get a baseline for your industry’s average multiple I like to use BizBuySell which is the largest platform for listing businesses for sale. They publish average earnings multiples and revenue multiples for the businesses that actually sell on their platform.
Check out BizBuySell’s Industry Valuation Multiples
As part of the SBA loan process, the lender will need a valuation of the business. Under SOP 50 10 8.1, when the purchase price is more than $350,000 (or the buyer and seller have a close relationship), the valuation must be prepared for the lender by an independent, credentialed business appraiser. For deals of $350,000 or less, the lender can do its own valuation.
The valuation matters more than ever: total transaction debt, including any seller note that is not on full standby, cannot exceed it. If the valuation comes in below your offer, the difference has to be covered by your own equity or a seller note on full standby, which can make the deal much harder to close. Our free business valuation calculator is a quick way to sanity-check the asking price before you write an offer.
One more threshold to know: if the purchase price is $3 million or more (excluding owner-occupied real estate), the SBA now requires a Quality of Earnings report prepared for the lender, and the lender must use the QoE-adjusted earnings to size the loan. The cost of the valuation and QoE can be passed on to the buyer, and what you spend counts toward your equity injection.
SBA Loan Qualifications for a Small Business Acquisition
SBA lenders are going to determine how much they are willing to lend for an acquisition loan based on how much debt service the business can cash flow based on historical financials - tax returns.
The magic number is a debt service coverage ratio of 1.25 or above for a standard acquisition (1.15 if you have owned a business in the same industry for at least two full fiscal years and the deal qualifies as a Business Expansion). Under the current rules, coverage is calculated as EBITDA divided by the combined debt service after the purchase, using the last fiscal year or a two-year average. Projections cannot be used to qualify the deal.
That means that the business should have $1.25 of earnings on the historic tax returns for every dollar of proposed debt service.
If your proposed loan payments amount to $100,000 per year, then the business will need to have shown a profit of $125,000 in the prior year.
Based on these constraints you can back into how much of an SBA loan the business might qualify for. If the business can’t qualify for $1,000,000 SBA loan based on debt service coverage ratio, then that should inform the offer that you make to the seller in the LOI. Lenders will also run a global cash flow analysis that includes your personal debts and living expenses, which has to show at least 1.0x coverage.
Can You Meet the Equity Injection?
The last pre-LOI check is your own cash. An SBA acquisition requires at least a 10% equity injection, and at least half of it (5% of the project cost at the minimum) has to come from your own cash, a gift, or a personal loan repaid from outside the business. A seller note on full standby can cover the rest. If you are buying a $1,000,000 business, plan on at least $50,000 of your own cash plus closing costs and working capital.
From my perspective, the goal of pre LOI due diligence is to make sure that the offer you are making is actually financeable with SBA.
Want a lender’s view before you sign an LOI? Request a free SBA expert review.
Ready to talk to lenders? Use our free SBA Lender Finder.
If you have a deal you would like for us to analyze through our Quality of Earnings “Sniff Test” process please feel free to reach out at support@projectionhub.com.
