Here’s a rule that catches many business buyers off guard: the SBA caps your loan proceeds at the business valuation amount. Not the purchase price. Not what you and the seller agreed to. The valuation.
This single rule shapes every SBA acquisition deal. It determines how much you can borrow, how much you need from other sources, and whether your deal structure actually works.
At GoSBA Loans, we structure deals around this rule every day. Here’s exactly how the purchase price cap works under SOP 50 10 8, and how to plan for it.
The Core Rule: Valuation Caps Proceeds
The SOP states it plainly:
“The maximum 7(a) loan uses of proceeds for any change of ownership is capped at the business valuation amount.”
And further:
“Any amount(s) of the loan proceeds that will be used to facilitate a change of ownership may not exceed the business valuation.”
This means:
- If the independent valuation says the business is worth $750,000, the maximum SBA loan for the change of ownership is $750,000
- It doesn’t matter if the purchase agreement says $900,000
- It doesn’t matter if both buyer and seller agree the business is worth more
- The valuation sets the ceiling on SBA-guaranteed financing for the acquisition
What Happens When the Purchase Price Exceeds the Valuation
When the business valuation is lower than the sales agreement price, the buyer needs to cover the shortfall. The SBA has a specific rule for this:
“Any financed capital required to meet the shortfall must be subordinate to the 7(a) loan.”
The practical options for covering the gap:
- Seller financing: The most common solution. The seller carries a subordinate note for the difference.
- Additional buyer cash: The buyer puts up more equity beyond the minimum 10% requirement.
- Third-party financing: Another lender or investor provides subordinate debt.
- Renegotiate the price: Reduce the purchase price to match the valuation.
Any debt used to bridge the gap must be subordinate to the SBA loan. No exceptions. The SBA loan always has priority.
Real Estate Is Valued Separately
This is a critical distinction that many buyers and even some lenders misunderstand:
The business valuation does not include real estate. Real estate is valued separately through a real estate appraisal. The two valuations serve different purposes and follow different rules.
The Business Valuation
- Covers the operating business — cash flow, equipment, inventory, intangible assets (goodwill, customer lists, etc.)
- Requested by and prepared for the Lender
- Caps the loan proceeds for the change-of-ownership component
The Real Estate Appraisal
- Covers commercial real property — land, buildings, improvements
- Must comply with USPAP standards
- Must be by a state-licensed or state-certified appraiser
- Must not include contributory value of rental income or intangible assets
- Dated within 12 months of the application
How They Work Together
Consider this example:
Total purchase price: $1,200,000
- Real estate appraised value: $500,000
- Equipment appraised value: $100,000
- Business valuation (excluding real estate and equipment): $500,000
Total supported value: $1,100,000. The SBA can finance up to $1,100,000. The remaining $100,000 must be covered by subordinate financing or additional buyer equity.
The $250,000 Threshold and Independent Valuation
Whether the lender can do its own valuation or must get an independent one depends on the intangible/business component:
Formula: Total amount being financed (including all sources: 7(a), 504, seller, other) minus the appraised value of real estate and/or equipment = the intangible/business value component
- ≤ $250,000: Lender may perform its own valuation
- > $250,000: Independent valuation from a Qualified Source required
- Close relationship between buyer and seller: Independent valuation required regardless of amount
Intangible Assets: What the SBA Finances
SBA-guaranteed loans can finance intangible assets as part of a change of ownership. These include:
- Goodwill
- Client/customer lists
- Patents and copyrights
- Trademarks
- Intellectual property
- Agreements not to compete
But they must be supported by the independent business valuation. The valuation must specifically identify and value these components.
Loan Term Impact
Intangible assets carry a maximum loan term of 10 years. This means acquisition deals with significant goodwill will have shorter blended maturities than deals heavy on real estate (up to 25 years).
For mixed-purpose acquisition loans:
- If 51% or more of loan proceeds go to real estate, maximum maturity is 25 years
- Otherwise, the maturity is blended based on asset types
- For stock purchases, maturity may be based on the underlying assets as supported by the valuation/appraisal
Special Purpose Properties: Separate Component Valuation
For businesses operating from special purpose properties (hotels, gas stations, nursing homes, etc.) where the intangible component exceeds $250,000, the valuation must allocate separate values to:
- Land
- Building
- Equipment
- Intangible assets
This component-level valuation is essential because it determines:
- How much of the loan is “real estate” (affecting maturity)
- How much is “intangible” (10-year max term)
- Proper collateral allocation and lien positions
When Valuation Comes In Low: PLP vs. Non-Delegated
Non-Delegated (LGPC) Loans
The business valuation must be submitted with the application. If it supports less than the purchase price, the deal structure must account for the gap upfront.
PLP (Delegated Authority) Loans
The valuation may be obtained after the SBA Loan Number is issued and before closing. But:
- The credit memorandum must include an estimate of value at application
- After receipt, the credit memo must be updated to compare the loan amount against the actual valuation
This means PLP lenders have more flexibility on timing, but they still can’t close a loan where proceeds exceed the valuation.
Practical Strategies for Dealing with the Valuation Cap
Strategy 1: Structure Seller Financing for the Gap
The most common approach. Negotiate seller financing upfront as part of the purchase agreement, subordinate to the SBA loan. Include it in the debt service analysis.
Strategy 2: Adjust the Purchase Price
If the valuation comes in significantly below the agreed price, it may signal the deal is overpriced. Use the valuation as leverage to renegotiate.
Strategy 3: Challenge the Valuation (Carefully)
If you believe the valuation is flawed, the lender can engage the valuator to discuss methodology. But you can’t shop for a higher number — the valuation must be commissioned by and prepared for the lender.
Strategy 4: Increase Real Estate Value
Since real estate is separately appraised and doesn’t count against the business valuation cap, a higher real estate appraisal creates more room under the total financing package. But you can’t manipulate this — the appraisal must be USPAP-compliant and based on market evidence.
Strategy 5: Additional Buyer Equity
Simply put more cash into the deal. This reduces the financed amount and may bring the SBA loan within the valuation cap.
Fixed Asset Valuation: A Separate Analysis
Equipment and other fixed assets are also valued separately. If the valuation of fixed assets is greater than their Net Book Value, an independent appraisal by a qualified individual is required. Importantly:
- A valuation of fixed assets provided as part of a business valuation will not meet this requirement
- Exception: a going concern appraisal that includes fixed asset valuation may satisfy this
- The appraiser must be independent of the loan production function
Lender Verification: The Final Check
Even after obtaining the valuation, the lender must verify the underlying financial data against the seller’s IRS transcripts. If discrepancies emerge — revenues don’t match, expenses are different — the valuation itself may need to be revised, which changes the cap on proceeds.
The Bottom Line
The SBA purchase price cap isn’t a suggestion — it’s a hard limit that controls how much you can borrow for an acquisition. Every deal must be structured with this rule in mind from the beginning, not discovered at the end when the valuation comes in.
Plan for it. Structure seller financing as a contingency. Get transcripts early to avoid valuation surprises. And work with a lender who understands how all the pieces fit together.
Structuring an SBA acquisition and need to understand how the valuation cap affects your deal? Contact GoSBA Loans — we’ll model the numbers and help you structure a deal that works within SBA rules.
