SOP 50 10 8.1 is set to take effect for all SBA loans approved on or after October 1, 2026.  In this article, we will explore the new Appendix 15 in SOP 50 10 8.1, which consolidates the 7(a) loan change of ownership (“COO”) rules.  Appendix 15 categorizes every COO transaction into one of four defined types: (1) Initial Acquisition, (2) Business Expansion, (3) Owner Buyout, and (4) ESOP & Cooperatives. The category determines the required equity injection, debt service coverage, and financial diligence rules that apply to the loan.

The four COO categories are summarized below, but first, a few noteworthy items from Appendix 15:

• 7(a) Small loans may no longer be used for any COO transactions, regardless of size.
• Business valuations are now required for all
• Debt service coverage (“DSC”) requirements must be met using historical or adjusted historical earnings from the last fiscal year-end or a two-year average. Projections cannot be used to meet the DSC requirements.  Several of the COO categories now have an increased DSC requirement of 1.25:1 (see below for specifics).
• A Quality of Earnings Report, prepared by an experienced financial professional for the benefit of the Lender, is now required for Initial Acquisitions and Business Expansions when the business purchase price, excluding owner occupied real estate, is $3,000,000 or more
• Collateral requirements are no longer based on loan size.
• When Seller is permitted to remain as a consultant, the term of such consulting is now a maximum of 24 months rather than 12 months.
• Limited equity injection sources, such as standby debt, seller debt and non-controlling minority equity investments, may not exceed half of the required equity injection.
• The loan maturity for COO transactions may be ten years, or a blended weighted average if loan proceeds are also allocated to real estate.

And now, a summary of the four COO categories, including the required equity injection, debt service coverage, and financial diligence requirements for each category:

Category 1: Initial Acquisition (the default category)

• An Initial Acquisition is a transaction in which a new majority or largest individual owner, who was not previously an owner or employee of the business, acquires the target business.
• Equity injection requirement: 10% of total project costs plus additional uses of proceeds in the loan, and cannot be reduced or eliminated
• DSC requirement: 1.25:1
• Quality of Earnings Report: required if business purchase price, excluding owner-occupied real estate, is $3,000,000 or more

Category 2: Business Expansion

• A Business Expansion involves an existing small business with at least two full fiscal years under its current ownership purchasing 100% of another business in the same four-digit NAICS Industry Group, with no reduction in full personal guarantors.
• Equity injection requirement: 10% of total project costs plus additional uses of proceeds in the loan; HOWEVER, the Lender may reduce or eliminate the requirement if it documents sufficient liquidity and working capital to sustain operations after the transaction and confirms that the applicant’s net worth was not negative at the last fiscal year-end.
• DSC requirement: 1.15:1
• Quality of Earnings Report: required if business purchase price, excluding owner-occupied real estate, is $3,000,000 or more

Category 3: Owner Buyout

• An Owner Buyout includes changes of ownership between existing owners and partial changes of ownership. At least one member of the original ownership must remain in the business and personally guarantee the loan, regardless of post-sale ownership percentage. Also, any individual not currently employed by the business may only acquire less than 50% of the total equity and may not become the largest direct or indirect shareholder.
• Equity injection requirement: 10% of purchase price; HOWEVER, the Lender may reduce or eliminate the requirement based on documented liquidity and working capital and confirmation that the applicant’s net worth was not negative at the last fiscal year-end.
• DSC requirement: 1.25:1
• Quality of Earnings Report: not required

Category 4: ESOP & Cooperative

The fourth category covers employee-ownership transactions structured through an Employee Stock Ownership Plan or cooperative, where the ESOP or cooperative is purchasing a controlling interest in the employer small business.  Any seller who remains as a partial owner following the transaction must provide a full unlimited guaranty.

• Equity injection requirement: 10% of total project costs; HOWEVER, there is no equity injection requirement for loans to ESOPs for purchases of a controlling interest of 51% or more in the employer small business.
• DSC requirement: 1.25:1
• Quality of Earnings Report: not required

Lenders should review the new COO requirements closely, and update their credit and closing policies and procedures accordingly, to ensure their SBA guaranty remains intact on COO loans.   For more information regarding changes set forth in SOP 50 10 8.1, and assistance with internal policy updates and COO transaction structuring questions, please contact the attorneys at Starfield & Smith, PC at info@starfieldsmith.com or (215) 542-7070.