SBA: June 1, 2025 (SOP 50 10 8) Update

Starting June 1, 2025, the Small Business Administration (SBA) drastically tightened the rules around business‑sale loans (7(a)/504). Here’s what you really need to know and ways alternative equity might be able to help:

TL;DR

• Seller notes: Now must be fully deferred (no payments until SBA loan is paid off) and can only cover half of the buyer’s required down payment.
  
  
• Rollover equity: If sellers retain any ownership, they’re required to personally guarantee the loan, and deals are being strong-armed into stock sales (not asset sales).
  
  
• Financial statements: Financials prepared by a CPA (not necessarily audited) are now acceptable for SBA financing in lieu of tax returns.
  
  
• Ownership rule: Businesses funded by SBA loans must be fully owned by U.S. citizens or permanent residents.

There’s a silver lining: Phantom equity. An alternative equity structure that doesn't trigger the SBA requirements.

1. Seller financing just got stricter

Before, sellers could help buyers cover their required down payment by offering “seller notes,” essentially loans from the seller to the buyer. Now, SBA rules limit how flexible this option is:

• Sellers can still offer a note to help with the down payment, but only up to half of the required 10% down.
  
  
• The buyer can’t make any payments (interest or principal) on this seller note until the SBA loan is fully paid off (usually after 10 years).

In other words: sellers can still help buyers with financing, but the money is locked away with no immediate repayments. This means buyers need more cash upfront and sellers have less flexibility.

2. If the seller keeps any equity, they must guarantee the loan

• Retain any ownership? Even 1%? You’re on the hook. The seller must personally guarantee the full loan for the first 2 years. This includes key employees who have equity, too.
  
  
• This bar is much higher than before, where under 20% ownership was often exempt. New rules treat all minority rollover equity the same.

Special Note for Contractors & Skilled Trades

If you’re a contractor or owner of a business in the trades, the SBA changes also impact how you handle trade licenses during a sale. Previously, sellers often retained (rolled) partial equity so they could hold onto licenses temporarily, making the transition smoother for buyers who lacked necessary credentials.

Now, since retaining even a small amount of equity triggers a mandatory personal guarantee for the seller, this approach is far riskier and off the table for most. 

A practical workaround: Phantom equity or profit-sharing incentives can be granted to those holding necessary licenses to ensure they remain engaged and motivated without the direct equity ownership. This avoids triggering SBA equity rules, preserving your license management strategy without the downside.

3. Partial ownership now must be a stock deal

• Partial acquisitions must be structured as stock sales. Period. Asset deals no longer qualify for SBA financing.
  
  
• From a deal structuring perspective, that’s major: tax, liability, licensing plans all need to be reworked.
  

4. All owners must be U.S. citizens or green card holders

• No more partial foreign involvement: 100% citizenship/legal-resident ownership is required across the board.
  

5. CPA-reviewed financials can replace tax returns

• Good news: when tax returns are a messy fit, lenders can now use CPA-prepared or reviewed financial statements instead.
  
  
• For carve‑outs, new entities, sole proprietors – that’s a smoother underwriting path.
  

How is each party affected differently by this change?

Buyers: If you’re using seller notes, count on 100% standby terms. No early payback, no creative payoff schedules. And any seller staying on must be a stockholder and guarantor.

Brokers and Sellers: Rollover equity used to be a smooth way to bridge valuation gaps, maintain continuity, and defer tax. Now, rollover triggers a 2-year personal guarantee and buyer cash needs are higher from day one.

Lenders: These tighter guardrails mean lower default risk – but also more complexity in structuring, documentation, and ownership tracking (especially citizenship certification).

Can alternative equity (i.e. phantom stock) help?

Alternative equity is cash-based incentives that mimic the benefits of stock or equity without the traditional drawbacks. 

Phantom equity or Profit‑sharing plans

• Non‑equity upside: Provide key sellers or managers with cash bonuses tied to future profits or triggers (like the sale of the business), without SBA-impacting ownership.
  
  
• No personal guarantee needed: Because there’s no actual equity, you avoid SBA rules around guaranties and stock sale requirements.
  

Earn‑outs & milestone bonuses

• Structure payments based on hitting revenue, profit, or performance metrics. Keeps the seller aligned and incentivized, without triggering SBA guardrails.
  

Management‑only rollover vehicles

• Keep true ownership at buyer level. Grant sellers or managers a separate phantom equity or profit-sharing interest outside the SBA‑backed entity.
  
  

These workarounds are designed to accomplish similar outcomes to rollover equity, support smooth handoff and stay compliant with the new SBA rules.