Your Best Year Doesn't Count Yet

Why the lender is looking backward

For SBA 7(a) applications received by SBA on or after October 1, 2026, SOP 50 10 8.1 spells out how coverage is measured on a change of ownership. The debt service coverage ratio must be met using either the last fiscal year-end or an average of the last two fiscal year-end statements, on a historical or adjusted basis.

For a typical acquisition by an outside buyer, the floor is 1.25x, plus 1:1 on a global basis.

Two things follow from that:

1. Trailing-twelve-month and year-to-date numbers are not the test. The lender must still analyze the latest interim statements against the same period last year, and a strong current year helps the credit story. The 1.25x is still measured on the fiscal years.

2. The two-year average only helps when the earlier year was the stronger one. For a business whose best year is the current one, it usually makes the picture worse.

Why "just use the forecast" stopped working

The buyer in this deal had a lender willing to underwrite on the forecast. Then that lender backed out, citing the SBA rule changes.

The lender was right. Under SOP 8.1, the lender must evaluate the buyer's post-closing projections, but it may not rely on them to meet the coverage requirement.

A forecast can still support the narrative. It cannot carry the ratio.

The gap, in numbers

Here is an illustrative example, not this deal's figures.

• Cash flow available for debt service last fiscal year: $250,000

• Cash flow on pace this year: $450,000

At 1.25x, last year supports $200,000 of annual debt service. This year would support $360,000.

If the agreed price assumes the bigger number, there is $160,000 a year of debt service the lender cannot underwrite today. That gap only closes by changing the timing or changing the structure.

Option one: make this year's tax return a closing condition

On this deal, I suggested the parties make the loan rely on this year's tax return, as a condition precedent to closing.

The mechanics:

1. The lender underwrites the deal and the structure now.

2. Closing is conditioned on the completed-year return coming in and supporting the loan amount.

3. When the return lands, the lender checks that box and the deal closes on the numbers the price was built on.

This only works if both sides move fast after year-end. The fiscal year closes December 31, and nobody can close until the return is filed. Buyer and seller both need their accountants ready to close the books and file early in the new year, rather than waiting for the deadline.

It also carries real risk, and everyone should sign up for it with eyes open:

• If the return comes in short, the loan gets resized or the deal is off.

• The seller has to keep running the business at full effort through a longer period between signing and closing.

• The LOI and purchase agreement need dates that allow a closing in the new year.

Option two: close now on last year's numbers and bridge the gap

If the parties would rather not wait, the loan has to be sized to last year, and the difference has to come from somewhere else:

• More buyer equity

• A seller note, keeping in mind that a note paying during the loan's life also counts against coverage

• A forgivable seller note tied to performance, where the seller forgives part of the note if the business misses the target. SBA does not allow earnouts, so this is the structure that does that job.

Option two gets the deal closed sooner. It asks the buyer or the seller to carry more of the bet that this year is real.

What to line up either way

1. Interim statements. Current year-to-date against the same period last year, clean and signed. The lender has to analyze them regardless.

2. Written support for every add-back. Under SOP 8.1, an adjustment without the lender's supporting analysis and justification does not count. If this year's jump comes from cutting costs, such as salaries for staff who have left, document it.

3. The accountant, early. A closing condition tied to a return is only as fast as the person filing it.

4. Deal dates that fit. Match the LOI and purchase agreement timeline to the option you pick.

5. A lender that will write it. Some lenders will put a return-based condition in the term sheet, and some will not. Ask before you sign an LOI that depends on it.

The Bottom Line

When this year beats last year, the borrower and the lender are looking at two different years. SOP 8.1 made the lender's year (last year) the gating item, and it took the forecast off the table as a way around it.

You can wait for this year to become last year, with the tax return as the closing condition. Or you can close on last year and let equity and seller financing carry the difference. Pick one on purpose, before the LOI is signed.

Tell a Friend

If you received this newsletter from a friend, don't miss out on future insights. Subscribe now at thefinancingflow.net to receive weekly issues directly to your inbox.

To your financing success!