Best Practices: Working Capital True-Ups: What 7(a) Lenders Need to Know

Financing a change of ownership with an SBA loan requires lenders to pay close attention to the purchase agreement deal terms.  In SOP 50 10 8.1, SBA continues to prohibit seller earnouts in changes of ownership, which may increase the purchase price paid to Seller based on the business’s post-closing performance and impact the borrower’s cashflow. The SOP clarifies that both buyer rebates and working capital true-ups are permissible in changes of ownership transactions if documented and funds are applied appropriately.

Buyer rebates may reduce the purchase price post-closing based on defined performance outcomes set forth in the purchase agreement.  If the company fails to meet certain targets, the seller must reimburse some of the purchase price to the borrower.  Working capital true-ups are fundamentally different. Rather than reward or penalize future performance, a true-up reconciles the working capital actually delivered at closing against the agreed upon target amount, ensuring the purchase price reflects the business the buyer received. This distinction is critical under SBA’s recent technical updates to SOP 50 10 8.1: the characterization of the payment received by the borrower determines whether the borrower must use the funds to pay down the SBA loan or may retain the funds to support business operations.

When a borrower receives a performance-based rebate from the seller, the borrower must apply the funds to the principal balance of the 7(a) loan that financed the change of ownership. This required paydown does not trigger the subsidy recoupment fee. Under 13 CFR § 120.223, the fee generally applies when a borrower voluntarily prepays more than 25% of a loan with a maturity of at least 15 years during any one of the first three years after the loan’s initial disbursement.

Rather than reflecting how the business performs after closing, a working capital true up corrects a shortfall in the working capital that was supposed to be delivered as part of the acquisition. Because the payment addresses a deficiency that existed at closing, SBA does not treat it as a rebate. The borrower may retain the funds to cover the business’s ongoing working capital needs instead of applying them to the acquisition loan.

The documentation needs to support the distinction between these two different types of payments to a borrower.

When reviewing a purchase agreement, lenders should:

• Confirm the agreement states a working capital target, measurement date, and calculation method.
• Separate true-up mechanics from any performance-based price adjustment, so a rebate or earnout cannot hide under a working capital label.
• Reconcile the closing balance sheet to the true-up and avoid double-counting the same liquidity in underwriting.
• Document the source of any post-closing seller payment in the loan file and apply rebate funds to principal promptly.
• Confirm the governing SOP. SOP 50 10 8.1 applies to applications issued an SBA loan number on or after October 1, 2026.

The loan file should also reconcile the closing balance sheet with the true-up calculation. Clear records can help establish that the payment corrects a closing-date shortfall rather than compensating the buyer based on the business’s later performance. For more information on post-closing price adjustments, contact the attorneys at Starfield & Smith, P.C. at 215.542.7070 or visit us at www.starfieldsmith.com.