The SBA published major SOP changes this week, effective October 1st. I shared my initial breakdown and predictions on LinkedIn earlier this week - links here and here - and wanted to bring it all together in one place, along with an update on where we stand today. A link to the new SOP is here. Four SOP Changes We're Focused on for the ETA Community The buyer must fund at least 5% of the total project cost as a personal equity injection - on a $2M deal, that's a $100K personal check. Outside investor capital that contributes to the 10% minimum equity injection cannot receive distributions other than for taxes until the SBA loan is repaid in full. Outside equity not used for the 10% minimum is unaffected. The bank must now get a QoE done on deals of $3M or more. You should always do one anyway, but you may now have less flexibility in choosing your provider. Any trust with an ownership interest in the business - at any percentage - now triggers personal guarantee requirements for both the trustee and the trustor. This is a meaningful change for buyers who were planning to use a trust in their ownership structure, or for funds that have trusts as part of their LP base. What We Think Happens Next Some of these we're already seeing, even though the rules don't take effect until October 1st: Lower purchase prices on SBA deals - a direct consequence of point two below. Meaningfully fewer eligible buyers now that the SBA requires a personal equity injection of at least 5% of project cost from the searcher. Even greater demand for non-SBA debt options on deals with $1M to $2.5M of EBITDA. Someone is going to see this gap and capitalize on it. More buyers doing sale-leasebacks or passing on real estate entirely, now that it can no longer be used to extend amortization on the business acquisition loan. Less equity capital available for buyers. We are working to figure out how we can still invest in SBA deals, but multiple investors have told us they're probably throwing in the towel. The frequency and magnitude of policy changes has made it challenging to maintain a cohesive strategy. Better transition outcomes now that sellers can stay involved for up to 24 months instead of 12. Full standby seller notes for 5% of project cost become dramatically more common, since they can still fill half of the required 10% equity injection - and investors won't want to fill that slot given the distribution restrictions. Next Steps as Investors We're actively working through what's still legally possible within the new rules. We want to keep investing in SBA deals where we can - but we're not going to pretend we have all the answers yet. If you have a deal in progress and these changes affect you, the most important thing to know is this: deals that receive an SBA loan number on or before September 30th are under the old rules. Time is of the essence; reach out if we can help. Partner Perspective: Eli Albrecht, Albrecht Law: The Art of the Retrade We are seeing a lot of QoEs come back with lower financials or higher net working capital, leading to retrades. As a buyer, how you handle a retrade will determine whether your deal dies or can be salvaged. This is extremely sensitive and must be handled with great care. Retrading is difficult and highly sensitive. They can be done, but have to be handled collaboratively and with care. By addressing retrades in these ways, you increase your chance of achieving the right result while maintaining critical goodwill. As always, please reach out with any questions. Here are 5 tips to address a retrade: 1. Don’t Retrade. Think long and hard before retrading. Retrading can impact your reputation and jeopardize the goodwill required to get deals closed. Some submit LOIs intending to retrade - I do not recommend this approach. This decision should not be taken lightly. However, if there is a real, concrete rationale for a price adjustment, continue to the next three points. 2. Direct communication and collaboration. Decide who is the best point of contact for this discussion. Best case - a skilled broker/investment banker will be able to properly present this to a seller to avoid emotions and come up with creative solutions to keep the deal on the rails. Alternatively, I have found good results from direct discussions between the buyer and seller. It is easier to have your lawyer do this, but important that this conversation be direct and honest. Take a posture of collaboration. I have a mentor who says, “How do we get to the right answer?” That should be the question. How to get to the most equitable result, together, given the facts as we now know them. 3. Point to hard evidence. It is critical that any price adjustment be supported by hard evidence. This could be the results of Quality of Earnings and financial diligence or financial statements not as rosy as the CIM projected. This needs to be something that changed from when buyer entered into the LOI (customer concentration or economic changes, i.e., tariffs). This hard evidence should be written down in a clear list and sent to broker/seller prior to having a retrade discussion. 4. Blame someone else. Buyer must retain goodwill and good faith throughout the transaction. Buyer and seller will often have to work together after closing, and deals run on goodwill. When goodwill turns into resentment, we start fighting over minor issues, and those deals rarely close. Thus, always blame someone else. Blame the lender and point to an appraisal (they are the best to blame), equity investors, accountants doing diligence, or your lawyer. As a buyer, you are the good guy, let someone else be the bad guy. 5. Soften the blow. You are asking for a price adjustment, that’s tough and unpleasant. No two ways about it. You have to soften the blow so seller can save face. This is deal-specific (and should be brainstormed with your lawyer). Some examples are: (a) reduce your indemnification escrow, (b) decrease the working capital peg, (c) sweeten terms on a seller promissory note, (d) increase the seller’s post-closing consulting free, (e) add an earn-out or increase the earn-out. You will never be fully happy with the retrade. Get to a compromise where both parties are unhappy. *when discussing with the seller, never use the term "retrade" always say, "purchase price correction". Plus: - Many small business owners overlook supplier strategy. Successful searcher Rob Brooks shares why this is a mistake - and how changing existing suppliers and retooling has paid dividends. - An honest and thoughtful podcast with an ETA searcher who acquired an HVAC business and then filed for personal bankruptcy 18 months later. Daniel Burnside walks through what he learned in detail in the podcast, and in brevity on Searchfunder here.redacted