"$165K next year." The banker nodded. Then the credit memo used last year's $110K EBITDA, coded 1.08x into the SBA loan system, and the Initial Acquisition never got a loan number under SOP 50 10 8.1.
This is general information, not legal or financial advice. Confirm every number against the current SOP and your lender before you sign anything.
The one tip
Buying a business you do not already own is an Initial Acquisition. For that category, Appendix 15 of SOP 50 10 8.1 sets debt service coverage at 1.25:1 minimum. Coverage equals EBITDA divided by combined debt service after closing. You measure on the last fiscal year-end or the average of the last two years, historical or adjusted.
Post-closing forecasts still go in the file. They do not satisfy the floor. The rule is blunt: the lender evaluates those forecasts and may not rely on them to meet coverage. What gets coded is the historical ratio. A pretty Year-2 slide does not rewrite last year's tax return.
One narrow carve-out exists for owner-occupied Special Purpose Property (hotel or self-storage where the real estate fully secures the loan and cannot be peeled off the operating company). There, projections can clear the floor within two years of funding, and the lender still shows historical coverage plus the variance story. Ordinary service, retail, and practice buys usually sit outside that carve-out.
Adjusted EBITDA is real when each add-back is justified in the credit memo (seller perks, one-time costs, ownership pay changes tied to a 1:1 global cash-flow test). Wishful "we will cut costs" lines with no support do not count.
Worked example
- Asking price: $650,000
- Fees, closing, working capital: $50,000
- Project total: $700,000
- Cash you put in (10%): $70,000
- 7(A) advance: $630,000
Use a 10-year amortizing payment at 10.5% for this illustration only — your rate will differ. Yearly principal and interest on $630,000 lands near $102,000. At 1.25x you need about $127,500 of trailing EBITDA.
- Trailing fiscal-year EBITDA on the books: $110,000
- Trailing coverage: $110,000 ÷ $102,000 = 1.08x — fail
- Your pitch deck Year 2: $165,000 EBITDA, or 1.62x on paper — does not move the floor
How founders actually close the gap:
- Inject more cash and cut the note. Another $80,000 equity drops the loan near $550,000, debt service near $89,100, and the 1.25x hurdle near $111,400. Now $110,000 plus a documented seller-perk add-back can finish the math.
- Structure seller paper on full standby so it drops out of the coverage denominator. Paying seller paper stays in the denominator and makes the miss worse.
- Pass on the LOI if trailing cash flow cannot carry the payment. Packaging fees on a dead file hurt more than walking early.
Do this week
- Collect the target's two most recent year-end packages and the latest interim, plus the same interim from a year ago.
- Prefer audited or reviewed statements over compiled packages or tax returns alone when both exist.
- Build the post-close debt schedule: new 7(a) payment plus every obligation that is not on full standby. Non-standby interest-only seller notes get tested on an amortization of 10 years or less (lines of credit excepted).
- Divide trailing (or two-year-average) EBITDA by that schedule. Put the ratio on one page before you negotiate price.
- If you sit under 1.25x, list only add-backs you can prove. Ask which ones your lender will put in the memo.
- Confirm category: Initial Acquisition vs Business Expansion (Expansion floors at 1.15:1 on a combined-entity view). Confirm SOP version — SBA loan numbers on or after October 1, 2026 use SOP 50 10 8.1.
Your lender can stack stricter overlays on SBA's floor. Separate "SBA minimum" from "their credit policy" in every call.
Sources: SBA SOP 50 10 8.1 (Appendix 15 — Initial Acquisition DSC 1.25:1, historical EBITDA over post-transaction debt service, projections may not be relied on to meet DSC); SBA Information Notice 5000-880695 (SOP 50 10 8.1 effective October 1, 2026).
Verified against SOP 50 10 8.1 text: October 4, 2026.