James gave a nice breakdown. Lenders were caught a little off guard in April so I think everyone is trying to digest what this means. I spoke with the local SBA officer and he stated they wanted to focus on two things: 1. they didn't want preferred shareholders having ANY sway on the business operations. The operating agreement needs to give the guarantor(s) complete control of the company. 2. Echoing James' comment, they are viewing (paid) preferred dividends as possibly considered as debt payments v. equity. These are not spelled out clearly in the SOP so it is open to interpretation. There is more detail than this, but the main point that hits search funds is the payments on preferred equity. As is typical, the SBA didn't come out and say this wasn't allowed, but rather inferred that the guarantee would not be honored in a default situation. So banks' options are, treat this detail as an SBA rule and change lending guidelines accordingly, or don't change policy and hope that it never goes bad. The remedies for this are 1. accrue the dividends until the SBA loan is paid off. 2. accrue the dividends but pay discretionary, pro rata distributions. This would mean you could not take a salary (or take a discounted salary) but pay yourself through distributions and then pay out the other shareholders that way.

It's definitely tougher to provide a bump to my IRR targets when I input the deal terms into my models. I think this is where more creative financing and terms can come into play.