Buying the Family Business With an SBA Loan
Under SOP 50 10 8.1 this is Owner Buyout. Down payment: 10%, lender may reduce or waive. Minimum debt service coverage: 1.25 to 1. Quality of earnings report: not required. The seller after closing: may stay on.
The deal
A daughter who has worked full time in her father's business for six years agrees to buy all of it from him for $300,000. He will not keep a stake. The two agree on the price between themselves.
- Who is buying: An owner buyout (an owner, employee or new partner buying all or part of an owner's stake)
- Business purchase price: $300,000
- Buyer in the business the last 24 months in a row: yes
- Buyer ends with 50% or more, or as the largest owner: yes
- A current owner keeps some ownership: no
- Negative net worth at the last fiscal year end: no
- Close relationship between buyer and seller: yes
What SBA requires here
SBA category
Owner Buyout
An Owner Buyout (existing owner buyout): current owners or employees buying out an owner.
Business valuation
Independent valuation required
The price is $350,000 or less, but a close relationship between buyer and seller means an independent valuation by an accredited Qualified Source, prepared for the lender.
SOP 50 10 8.1, Appendix 15, Para. C.1 (Business Valuation Requirements)
| Down payment | 10%, lender may reduce or waive |
|---|---|
| What can count toward it | Half can be a seller note |
| Minimum debt service coverage | 1.25 to 1 |
| Quality of earnings report | Not required |
| The seller after closing | May stay on |
| Loan term | Up to 10 years |
| Who signs the loan | The business and the buyer |
| Collateral | Business assets, then personal real estate |
Each answer is explained, with its SOP 50 10 8.1 citation, in the structurer below.
What changes if one answer is different
The same price between buyer and seller with no close relationship, run through the same rules.
| This deal | No close relationship | |
|---|---|---|
| SBA category | Owner Buyout | Owner Buyout |
| Down payment | 10%, lender may reduce or waive | 10%, lender may reduce or waive |
| Minimum debt service coverage | 1.25 to 1 | 1.25 to 1 |
| Business valuation | Independent valuation required | Lender may value it in house |
| Quality of earnings report | Not required | Not required |
| The seller after closing | May stay on | May stay on |
| Loan term | Up to 10 years | Up to 10 years |
| Who signs the loan | The business and the buyer | The business and the buyer |
Change the answers
The structurer below is loaded with this deal. Change any answer to see how the SBA rules move. Open the full change of ownership calculator.
SBA category
Owner Buyout
An Owner Buyout (existing owner buyout): current owners or employees buying out an owner.
- Down payment
- 10%, lender may reduce or waive
- What can count toward it
- Half can be a seller note
- Minimum debt service coverage
- 1.25 to 1
- Business valuation
- Independent valuation required
- Quality of earnings report
- Not required
- The seller after closing
- May stay on
- Loan term
- Up to 10 years
- Who signs the loan
- The business and the buyer
- Collateral
- Business assets, then personal real estate
At least 10% of the purchase price in the purchase agreement (about $30,000 on $300,000). The lender may reduce or eliminate it if the borrower has enough liquidity and working capital to run the business after the transaction, and the balance sheet was not negative at the last fiscal year end.
SOP 50 10 8.1, Appendix 15, Para. C.2.a (Equity Requirements)
Cash that is not borrowed (including a gift) counts in full. A seller note or other debt on full standby (no principal or interest for the life of the SBA loan) and minority investors (under 20%, no control) can together cover no more than half.
SOP 50 10 8.1, Appendix 15, Para. C.2.a (Source of Equity Injections)
The business has to cover its debt payments 1.25 times, using the last fiscal year end or the average of the last two.
SOP 50 10 8.1, Appendix 15, Para. C.2 (Lender's Credit Analysis)
The price is $350,000 or less, but a close relationship between buyer and seller means an independent valuation by an accredited Qualified Source, prepared for the lender.
SOP 50 10 8.1, Appendix 15, Para. C.1 (Business Valuation Requirements)
Owner Buyouts and ESOP & Cooperative transactions are not subject to the QoE requirement.
SOP 50 10 8.1, Appendix 15, Para. C.1 (Quality of Earnings)
The 24-month consultant limit applies to Initial Acquisitions and Business Expansions, not to an Owner Buyout, so the seller is not barred from staying on.
SOP 50 10 8.1, Appendix 15, Para. A (Change of Ownership Requirements)
A loan that finances a change of ownership cannot amortize over more than 10 years, and cannot have a balloon. Only owner-occupied real estate bought in the same deal can go longer.
SOP 50 10 8.1, Appendix 15 (Loan Maturities)
When owners or employees buy the shares, the business and the buyers are Co-Borrowers and sign the note jointly and severally. If the business instead redeems the departing owner's interest, the business is the Borrower and the remaining owners guarantee it under SBA's usual guaranty rules.
SOP 50 10 8.1, Appendix 15 (Types of Changes of Ownership)
The lender takes a lien on everything bought (vehicles have their own rule) and on the business's fixed assets. If they do not cover the loan, it must take available equity in personal real estate (home, investment property and other commercial property) solely owned by each Co-Borrower, owner of 20% or more and guarantor. Property with less than 25% equity is not required, and the lien can be limited to the shortfall. On a 7(a) Small or SBA Express loan, other commercial real estate is left out of that test, but a home is not.
SOP 50 10 8.1, Appendix 15 (Collateral)
Watch for
- If the lender waives the down payment, the loan cannot include dedicated permanent working capital, in this or any other 7(a) term loan, for 90 days. Working capital has to come from existing cash or a line of credit.
- Seller earnouts are prohibited. A working capital true-up at closing and rebates from the seller to the buyer are allowed.
SBA minimums from SOP 50 10 8.1 (effective October 1, 2026). Lenders can ask for more. General information, not a loan approval or legal advice. More SBA rules, answered.
Questions
What SBA change of ownership category is buying the family business?
Owner Buyout. An Owner Buyout (existing owner buyout): current owners or employees buying out an owner.
How much down payment does buying the family business need?
10%, lender may reduce or waive. At least 10% of the purchase price in the purchase agreement (about $30,000 on $300,000). The lender may reduce or eliminate it if the borrower has enough liquidity and working capital to run the business after the transaction, and the balance sheet was not negative at the last fiscal year end.
What debt service coverage does the lender need for buying the family business?
1.25 to 1. The business has to cover its debt payments 1.25 times, using the last fiscal year end or the average of the last two.
Does buying the family business need a quality of earnings report?
Not required. Owner Buyouts and ESOP & Cooperative transactions are not subject to the QoE requirement.
Can the seller stay on after buying the family business?
May stay on. The 24-month consultant limit applies to Initial Acquisitions and Business Expansions, not to an Owner Buyout, so the seller is not barred from staying on.
SBA minimums from SOP 50 10 8.1 (effective October 1, 2026), Appendix 15. Lenders can ask for more. General information, not a loan approval or legal advice.