Value Buddy

The SBA $5M club is getting crowded. Back in 2010, the SBA raised the 7(a) loan cap to $5M. In the first year, only 110 loans hit that ceiling. Fast forward to 2024, and nearly 500 loans maxed out at $5M. What does that tell us? Small business acquisitions are outgrowing the SBA cap, and there’s a funding gap forming. Many deals sit in the $5M–$10M range. Too big for SBA financing, but too small to attract traditional lower middle market PE buyers.

I’ve seen plenty of industry reports and databases tell me that rent should be 2.1% of sales. Or that owner compensation averages 1.9%. Or that a small business is worth 2.2x SDE because of a “rule of thumb.” But when you’ve reviewed thousands of small business financials, you start to notice something: averages don’t always reflect the reality of how businesses actually operate. Take rent. That 2.1% figure comes from industry databases that average businesses with and without rent expenses. But many owners hold their real estate in a separate LLC or have paid off their buildings entirely. In reality, rent as a percentage of sales often ranges from 5-10% and can vary drastically depending on whether the business is urban or rural and what city it is in. Or owner compensation. That 1.9% stat? It ignores the fact that many small business owners don’t pay themselves a salary—they take distributions instead. And then there are valuation multiples. “Rules of thumb” are everywhere, but when you actually look at market comps, they rarely line up neatly. Two businesses with the same earnings can sell for vastly different prices depending on industry, risks, and profitability. Databases and industry reports are great tools, but they’re just that: tools. The real skill is knowing when to trust the data and when to step back and ask, “Does this actually make sense?”

The SBA has a serious cash flow problem. But this time, it’s self-inflicted. For decades, the 7(a) program has relied on guarantee fees to keep itself running without requiring taxpayer subsidies. But in an effort to boost small-dollar lending, the Biden administration eliminated upfront fees on loans under $1M. At first, it worked. More small businesses accessed SBA financing, and loan volume surged. But there was a tradeoff. In FY24, these sub-$1M loans made up 88% of 7(a) volume, totaling nearly $13B. Had the standard 3.5% upfront fee applied, the SBA would have collected an additional $450M—wiping out most of its cash flow deficit. Now, the math isn’t adding up, and the new administration is signaling a course correction. With that, the era of “free” small SBA loans may be coming to an end. Shoutout to The BDO Show Ep. 48 for inspiring this post: Emily Detor Christopher Hackney Sterling Birdsong Alan Peterson Ryan Kroge, MBA, MSF

After preparing over 1,000 SBA business valuations, I’ve seen buyers make the same costly mistake over and over again. They focus on the price of the deal but ignore the real costs—the ones that don’t show up until after they take over. An SBA loan makes it easy to buy a business with 10% down, but that doesn’t mean the business is a good deal. The real costs? A bad Quality of Earnings decision that hides a six-figure cash flow problem Relying on a broker’s business valuation that inflates the financials with add-backs Legal fees that feel expensive—until you’re sued over something you missed Dead deal expenses that pile up, bleeding you out from Day 1. These aren’t just numbers on a spreadsheet. They determine whether you succeed or spend years digging out of a hole. If you’re trying to save money by cutting due diligence or legal, you don’t have a cost problem—you have a risk problem. If you can’t afford to do it right, you can’t afford to buy a business. Spend the money now, or pay 10x more when it all falls apart.

A seller once told me their SMB was worth 4x EBITDA. When I asked how they calculated EBITDA, they confidently said, “Oh, I just added back my salary, my car, my health insurance, and some other stuff.” So… SDE? SDE and adjusted EBITDA both adjust for how a seller ran their business, but for SBA deals, SDE is the right tool. It captures all the financial benefits an owner pulls from the business, which matters when the buyer is stepping in as the new operator and, more importantly, has a personal guarantee to make the loan payments. At Value Buddy, we calculate adjusted EBITDA when relevant, but SDE is what drives SBA valuations because it aligns with how lenders underwrite cash flow. At the end of the day, the numbers should reflect reality—not just a multiple a search funder saw on Twitter.

The SBA just closed the door on foreign ownership. For years, the SBA allowed non-citizens to own up to 49% of a business, as long as U.S. citizens or green card holders retained control. That flexibility made it easier for buyers to raise capital, structure deals, and bring in strategic investors. But as of March 7, 2025, that rule is gone. Under the new policy, SBA loans are only available to businesses that are 100% U.S.-owned—no more minority foreign investors, no exceptions. For buyers relying on investor capital, this is a major shift. A work visa holder investing in your deal? Disqualified. A foreign national taking a passive stake? No longer allowed. Even long-term U.S. residents without green cards are now out. And the burden doesn’t just fall on buyers, lenders now face stricter compliance. Banks must verify and certify every beneficial owner, not just the majority. The old 51% rule is dead. SBA financing is still the best game in town for small business acquisitions, but only if you play by the new rules.

When reviewing a CIM for quick-service restaurant deal today, I couldn’t help but laugh. A business shows $1M of EBITDA, sweet. The broker used a multiple of 3.6x, sounds reasonable. Adding back owner’s compensation and calling it adjusted EBITDA, no way! At that point, it’s not adjusted EBITDA — it’s just SDE in disguise, like putting glasses on Super Man and insisting that he's unrecognizable (obviously Clark Kent also needs a suit!). At Value Buddy, we adjust owner compensation to a fair market rate, not wipe it out entirely. And while we run an EBITDA market approach, it’s mostly used as a reference point, not the main driver of value. Stretching the definition of adjusted EBITDA might look good in a pitch deck, but when it hits underwriting, the real numbers always tell the story.

We're thrilled to announce that Value Buddy will be heading to the Southeastern Small Business Lenders Conference (SESBLC) on March 10-12 in Cherokee, NC! This gathering of top SBA lenders, service providers, and industry pros is all about exploring the ever-evolving ??? nature of SBA lending ???. Accuracy, speed, and compliance are more important than ever. So, if you're looking for a valuation partner that keeps your deals on the right path, come find us at SESBLC!

Let's break down the math behind small business acquisitions. Private equity firms paid 8.6x EBITDA for middle-market deals ($50M–$1B) in Q3 2024, according to Capstone Partners. Meanwhile, the median multiple on 1,858 small business deals over the past 12 months was just 3.8x, per BVR's DealStats. The median size of these small business deals was only $368,840. That’s a 56% discount per dollar of earnings. Even for investors looking to deploy more capital, many are rolling up multiple smaller businesses rather than buying one larger business. It’s not just about price—it’s about flexibility, lower leverage requirements, and the ability to build value through scale. Small business M&A is no longer a niche play. The demand is real, and the numbers don’t lie. #sba #businessvaluation #businessacquisition #smallbusiness #middlemarket

The $5M loan cap for SBA 7(a) loans has not been updated since 2010 when it was raised from $2M. While this increase was significant at the time, the business landscape has changed dramatically over the past 14 years, and the cap no longer reflects the realities of today’s small business economy. Here’s why: In 2011, the median seller's discretionary earnings (SDE) of acquired businesses was $75,495, according to DealStats. By 2024, this number had more than doubled to $157,579. Similarly, data from BizBuySell shows the median sales price of small businesses increased from $152,450 in 2011 to $342,745 in 2024. SBA FOIA data reveals a significant increase in loans hitting the $5M threshold—from just 110 in 2011 to 471 in 2024. This trend suggests borrowers are often forced to supplement SBA loans with pari passu financing, a seller's note, or forgo SBA lending entirely for larger acquisitions. For borrowers, the $5M cap can restrict the ability to secure adequate financing, particularly for working capital needs that are critical to running and scaling a business. The amount of working capital needed and the general cost of doing business have increased drastically since 2010 due to inflation. Businesses above the cap are supposed to “graduate” to conventional lending, but many lack the required financials for larger loans, especially given the higher down payments required in traditional lending. Raising the SBA 7(a) loan cap, potentially to $10M, would align the program with today’s economic realities and inflation-adjusted needs. It would also keep the 7(a) program competitive for small business acquisitions and expansions. Unfortunately, raising the cap requires congressional action, and progress has been slow. But with nearly 500 loans already maxing out annually, it’s clear the demand exists. The SBA 7(a) program is one of the most effective tools for small business growth, and updating its limits would ensure it remains relevant and accessible. cc: Ace McGill Timothy Gbur Ted Leverette The Business Buyer Advocate Max Friar Matt Paul John Soldi Hal Stanton Ryan Kroge, MBA, MSF Nader Hashemian, CFA Matthias Smith