Succession Stories EP237: What Buyers and Sellers Must Know About SBA Financing in 2026, with Aaron Aldrich, Northwest Bank
"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.
What Every Business Owner Should Know Before a Deal Gets Done
Most conversations about selling or buying a business eventually become a financing conversation. And yet, for many business owners, the lending side of a transaction remains one of the least understood parts of the process.
In this episode of Succession Stories, I sat down with Aaron Aldrich of Northwest Bank to unpack what's actually happening in SBA (Small Business Administration) lending right now, including some significant rule changes that are already affecting how deals get structured and what buyers and sellers need to know before they get to the table.
This is a practical one. Take notes.
It's Not Just for Buying a Business
When most people hear SBA lending, they think of a single entrepreneur buying a small company. But the scope is broader than that.
Aaron walked me through four types of ownership transactions that SBA financing can support. The first is an initial acquisition, where someone buys 100% of a business. The second is an ownership buyout, where one partner is buying out another while someone remains in the business. The third is a business expansion, where an existing owner acquires a competitor or complementary company. And the fourth is an ESOP (Employee Stock Ownership Plan), where employees are purchasing the business.
The two most common are initial acquisitions and business expansions. But knowing all four options exist matters, especially for founders who are thinking about partial transitions or employee ownership structures.
The Rules Are Changing. Here's What You Need to Know.
The SBA updates its standard operating procedures periodically, and we are in one of those cycles right now. The changes taking effect are meaningful, and if you are planning a transaction, understanding them early is far better than getting surprised mid-process.
The biggest shift involves equity injection requirements.
Previously, a buyer could use a combination of a seller note and outside investor funds to meet the 10% equity requirement without putting in any of their own personal savings. That changes with the new SOP. Any cash from investors or a seller note is now capped at 5%, which means buyers are required to bring at least 5% from their own personal savings.
The goal is straightforward. The SBA wants skin in the game. A buyer who has put their own money into a deal is far less likely to walk away when things get hard. Aaron was candid about why this matters. There has been a wave of buyers, some influenced by social media strategies around acquiring businesses with no money down, who have defaulted at higher rates. This change is a direct response to that trend.
If you are a buyer, plan accordingly. If you are a seller financing part of the deal through a seller note, understand that the note must be on full standby, meaning no principal or interest payments until the SBA loan is fully paid off.
The Quality of Earnings Requirement Is a Big Deal
One of the most significant changes coming is a new Quality of Earnings, or QofE, requirement for transactions above a certain threshold.
A third-party vendor, vetted by the bank, will conduct a deep dive into the seller's financials to verify that the adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is what the seller claims it is. This is not optional for qualifying transactions, and it adds both cost and time to the process.
The cost typically runs between $18,000 and $25,000 depending on the complexity of the business, and it adds approximately four to six weeks to the transaction timeline. The cost can be included in the loan, but it is non-refundable once the work is completed. And here is the part that catches many sellers off guard. A seller-commissioned QofE done for their own preparation does not satisfy this requirement. The bank will order its own from an approved vendor regardless.
That last point is worth sitting with. Even if a seller has already invested in a quality of earnings review as part of their preparation work, which I often encourage, a separate bank-ordered review will still be required. That said, doing your own sell-side QofE in advance is still a valuable exercise. It helps you understand your financials, identify risks, and get ahead of the questions buyers will ask.
How Lenders Think About Risk
Not all transactions are created equal in the eyes of a lender. Aaron walked me through the factors that make a deal feel more or less risky from the bank's perspective.
On the buyer's side, the first question is industry experience. Does the buyer know this business? If not, it is not automatically a deal-breaker, but the buyer needs a clear plan to mitigate that gap. Is there a strong general manager who will stay on? Are there employment contracts in place for key employees? Is the business's day-to-day operation documented well enough for someone new to step in?
On the business side, customer concentration is a major flag. If a significant portion of revenue comes from one or two clients, that creates risk the lender has to account for. Industries like restaurants, hotels, and small contractors sit at the top of most conventional banks' high-risk lists. SBA lending exists in part to serve those industries, but appetite still varies from bank to bank. Exclusion lists change over time, and it is always worth asking directly.
The Math That Makes or Breaks a Deal
Debt service coverage ratio, or DSCR, is one of the most important numbers in any acquisition financing conversation. It measures whether the business generates enough cash flow to cover its loan payments. At Northwest Bank, Aaron looks for a 1.30 DSCR for the first tax year of an ownership change transaction, meaning the business needs to generate $1.30 in cash flow for every $1.00 of debt service.
The adjustments and add-backs matter enormously here. Owner's compensation, personal expenses run through the business, and other normalizations can all affect the calculation. But Aaron made an important point that I want to underscore. Deals work better when the cash flow works before the add-backs, not only because of them.
I shared a story from my own experience on the sell side where a buyer walked away from a transaction that was otherwise a strong fit. Once he loaded in market-rate rent for a space the seller had been using below market, and factored in the cost of replacing the owner's labor, the DSCR simply did not work. The economics could not support the deal at the asking price.
That is why this math needs to happen early. Not after the LOI. Not during due diligence. Early.
For Sellers: Start Three to Five Years Out
When I asked Aaron when a seller should bring a lender into the conversation, his answer aligned closely with what I tell my own clients. Three to five years in advance.
Not to get a loan. But to understand how a lender will evaluate the business, what documentation needs to be in order, and what trends in the financials will matter most to a buyer's financing. A seller can also request a pre-qualification letter from an SBA lender, which signals to buyers and brokers that the business is financeable. That is a meaningful advantage when bringing a company to market.
He also made a point I find myself repeating constantly. The worst thing a seller can do is mentally check out in the final years before a sale. Once an owner knows they are leaving, it is human nature to ease off. But a lender and a buyer are going to look at three years of financials. Trending revenue matters. A dip in the final year before a sale is a red flag that can affect both the valuation and the financing.
For Buyers: Get Ready Before You Find the Deal
The time to talk to a lender is not after you have found the business you want to buy. It is before.
Aaron's advice for buyers is to have their equity situation clearly understood, know what industries or deal sizes they are targeting, and be able to articulate a clear acquisition thesis. He also emphasized the importance of post-transaction liquidity. Having just enough to close the deal is not enough. Lenders want to see that a buyer will have working capital left over after the transaction closes. A business plan with two-year projections is also required, and the assumptions behind those projections matter as much as the numbers themselves.
A Final Thought
What I appreciate most about this conversation is how practical it is. Financing is often treated as the last piece of the puzzle, something to figure out once a deal is taking shape. But as Aaron makes clear, the financing structure affects everything. It affects the price that works, the terms that are realistic, the timeline, and the risk profile for both sides.
Sellers who understand how a lender will evaluate their business can make better decisions about how to prepare it. Buyers who understand the math before they fall in love with a company can protect themselves from deals that look right but don't work on paper.
The best transitions are the ones where everyone comes to the table informed. This conversation is a good place to start.
Listen to the full episode to hear Aaron walk through the details, including the pari passu structure that opens the door to larger transactions in the lower middle market.
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By your side,
Laurie Barkman
You can watch the full YouTube Episode here:
Connect with Aaron Aldrich:
Website: https://www.northwest.bank
Email: [email protected]
LinkedIn: https://www.linkedin.com/in/aaron-aldrich-mba
