237: What Buyers and Sellers Must Know About SBA Financing in 2026, with Aaron Aldrich, Northwest Bank

Podcast Episode Description

"It is never too early to come and talk to a lender." SBA lending rules are changing in ways that every business buyer, seller, and advisor needs to understand before they get to the closing table. Aaron Aldrich of Northwest Bank breaks down what is new, what it means for deal structure, and why a conversation with a lender three to five years before a transaction could make the difference between a deal that closes and one that falls apart.

Summary

"It is never too early to come and talk to a lender." Host Laurie Barkman sits down with Aaron Aldrich, SBA lender at Northwest Bank, for a practical and timely deep dive into everything business owners, buyers, and advisors need to know about SBA financing for ownership transitions.

Aaron covers the four types of ownership changes SBA can finance, why the new SOP changes matter for equity requirements and quality of earnings, how lenders evaluate risk in a business acquisition, and what both buyers and sellers should be doing years in advance to improve their chances of getting a deal done at the right terms. This is the episode to share with every client who has a transaction on the horizon.

Key Insights

1. SBA lending covers four types of ownership transactions, not just one. Most people associate SBA loans with someone buying a small business outright. But SBA financing also covers partial ownership buyouts, business expansions through acquisition, and employee stock ownership plans. The two most common are initial acquisitions and business expansions.

2. SBA allows buyers to put down just 10% versus 20% with conventional lending. The 75% federal guarantee on SBA loans allows banks to take on riskier transactions like ownership changes, which conventional lenders often avoid or require more collateral for. That lower equity requirement preserves cash for buyers coming into a new acquisition.

3. New SOP rules require buyers to have at least 5% of their own personal savings in the deal. Under the updated rules effective October 2026, the remaining 5% can come from a seller note or outside investors. But the days of buying a business with none of your own money are effectively over. The SBA is requiring skin in the game from every buyer.

4. Quality of earnings reviews are now required on transactions of three million dollars or more. A QoE costs around $20,000, takes four to six weeks, must be completed by a bank-vetted vendor, and is non-refundable once completed. A seller-commissioned QoE cannot be used. Buyers pay for it, and it must be factored into both the timeline and the budget for any qualifying transaction.

5. Debt service coverage ratio is the first filter on every deal. The SBA minimum DSCR is 1.25 for ownership changes. Most banks layer their own requirements on top of that. Northwest Bank looks for 1.30 for the most recent tax year. If the math does not work at the asking price, the deal does not work regardless of how good the business is.

6. Sellers should start building their team three to five years before going to market. That team should include a broker or M&A advisor, a CPA, and an attorney. The business should be trending upward during that window. A lender can also prequalify a listing before it goes to market, giving brokers a financing confirmation letter they can include in their marketing materials.

Chapters:

• 00:04 Introduction of Aaron Aldrich

• 01:57 The Four Types of Ownership Transactions SBA Can Finance

• 03:34 Why SBA Loans Are More Attractive Than Conventional Lending

• 04:46 The 10% Equity Requirement and How It Works

• 05:22 New SOP Changes: What Is Changing and Why

• 06:34 Seller Notes, Investor Equity, and the New 5% Personal Savings Requirement

• 08:00 Why the SBA Is Requiring Skin in the Game From Buyers

• 09:37 Risk Factors Lenders Evaluate in a Business Acquisition

• 11:00 Industries With Higher Risk and How Banks Think About Them

• 13:19 What Is a Quality of Earnings Review and Why Is It Now Required

• 15:42 How Much a QoE Costs and How Long It Takes

• 16:33 Who Pays for the QoE and Who Chooses the Vendor

• 18:41 Can a Seller-Commissioned QoE Be Used by the Bank

• 19:11 Debt Service Coverage Ratio Explained

• 20:26 The Minimum DSCR Requirements and How Northwest Bank Applies Them

• 21:24 A Real Deal That Fell Apart Because of DSCR

• 24:01 CapEx and Add-Back Considerations During Due Diligence

• 24:39 Pari Passu Structure for Transactions Above the $5 Million SBA Cap

• 26:49 When Sellers Should Bring a Lender Into the Conversation

• 29:26 Pre-Qualification Letters for Brokers Going to Market

• 29:47 When Buyers Should Start Talking to a Lender

• 30:09 Post-Transaction Liquidity and What Lenders Look For From Buyers

• 32:08 Business Plan and Projection Requirements for SBA Loans

• 33:01 How to Connect With Aaron Aldrich

Is your business truly ready—and are you?
Take the Succession Readiness Assessment to get a clear snapshot of where you stand and what to focus on next.

https://btsherpa.com/succession

P.S. Most owners don't realize where they stand until they're already in a transition. Take a few minutes now to understand your readiness—and give yourself more options later.