The SBA credit memo for a change of ownership: what it must cover
Short answer
For a 7(a) change of ownership, SOP 50 10 8.1 requires the credit memo to document the transaction type and why, the business and management, three years of historical financials and interims verified to IRS transcripts, historical DSC using QoE earnings where required, every adjustment with justification, global cash flow, a pro forma balance sheet and ratios, 12-month working capital, the valuation and how it supports the price, equity sources, collateral, insurance, credit elsewhere and the listed risk items.
Below is the memo structure we'd use to satisfy Appendix 15, in the order a reviewer reads it. Each line maps to a requirement in SOP 50 10 8.1 with technical updates.
Section-by-section checklist
1. Transaction
- Transaction type and the evidence supporting anything other than Initial Acquisition.
- Stock or asset purchase; continuity of operations; structure (borrower, co-borrowers).
- Business Purchase Price calculation (real estate removed at appraised value).
- Sources and uses; total project cost.
- Seller's post-closing role (consulting ≤ 24 months, or partial-change role).
- No earnout; any buyer rebate applied to principal; working capital true-up terms.
2. Business and management
- Description, history, industry, management structure.
- Buyer's industry experience; daily onsite management or alternative.
- Management agreement review for passive-business risk.
- Site visit date and comments (or e-commerce alternative rationale).
3. Financial analysis
- Three most recent FYEs at the best reporting level; current and prior-year interims (target and operating applicant).
- Tax transcript verification and reconciliation.
- Historical DSC (last FYE or two-year average) vs the type's minimum; QoE earnings if required.
- Each adjustment justified; owner-comp adjustments with global cash flow at 1:1.
- Interest-only additional debt tested at ≤ 10-year amortization.
- Projections evaluated (not relied on) except special purpose property rules.
- Global cash flow and affiliate effects.
- Pro forma balance sheet; current ratio, debt/TNW, DSC and industry ratios vs trends.
- Working capital adequacy for 12 months; rationale if working capital is 50%+ of proceeds.
4. Due diligence
- Valuation discussion: Qualified Source (or internal at ≤ $350,000), scope, conclusion vs price, gap handled with equity.
- Appraiser's source data verified against seller transcripts.
- QoE (if required): preparer independence, cash proof periods, findings used in DSC; or vendor review of a buyer's QoE.
- Total debt (incl. non-standby seller debt) ≤ valuation.
5. Equity
- Minimum by type; waiver rationale where allowed.
- Unlimited vs limited sources; limited ≤ 50%; standby agreements; investor terms and distribution limits.
- Verification documents.
6. Collateral, insurance, guaranties
- Fully secured analysis with SBA haircuts; personal real estate on shortfall; vehicles; licenses.
- Line of credit day-one rule if applicable; no piggyback.
- Life insurance (whom, how much, or why not); hazard and liability.
- Guarantors by post-sale ownership; selling-owner two-year guaranty if applicable; citizenship.
7. Risk items and approval rationale
- Credit not available elsewhere, with specific weaknesses.
- Competition; 90+ day delinquencies; trade disputes; citations; liens, judgments, bankruptcies, litigation including divorce.
- Franchise: franchisor information such as failed units and projections.
- Refinanced debt justification and late payments.
For the valuation section specifically, see how to review a valuation report.
Change-of-ownership checklist
A complete SOP 50 10 8.1 change-of-ownership file covers classification, eligibility and citizenship, the Business Purchase Price, a lender-ordered valuation (or internal at $350,000 or less), a QoE at $3 million and up, transcript verification, equity by source, historical DSC by type, global cash flow, collateral with SBA haircuts, insurance, seller terms (no earnout, 24-month consulting), site visit, and all purchase documents. The checklist below follows Appendix 15.
Tick each item as the file is built. Items marked with an SOP area to check.
1. Classify
- Change of ownership confirmed (stock/redemption, or substantially all assets with continuity).
- Transaction type selected and documented; entered in SBA system.
- Borrower/co-borrower structure matches type.
- Not a multi-step partial change; EPC limits checked.
2. Verify eligibility and data
- Size standard met with target combined.
- 100% of direct/indirect owners and guarantors U.S. citizens or nationals; entity owners U.S.-organized.
- No delinquent federal debt or unresolved prior loss.
- Seller and applicant transcripts obtained (IVES or 8821) and reconciled; division carve-outs verified by alternative third-party means.
- Site visit (applicant and target) documented.
3. Value
- Business Purchase Price calculated (real estate at appraised value removed) and entered.
- Valuation: Qualified Source engaged by lender, or internal at ≤ $350,000 without close relationship.
- Scope matches purchase agreement; report has conclusion, qualifications, signed certification.
- Appraiser source data obtained and verified to transcripts.
- QoE if Initial Acquisition/Expansion at ≥ $3M (not special purpose property): independent, for lender, cash proof TTM + 2 FYs, adjustments documented; or vendor review of buyer's QoE.
- Real estate appraisal (and special purpose property appraiser rules) where applicable.
4. Size
- Total debt incl. non-standby seller debt ≤ valuation; price above value covered by equity.
- Historical DSC ≥ type minimum (QoE earnings if required); adjustments justified; interest-only debt at ≤10-yr amortization.
- Global cash flow ≥ 1:1; owner comp sufficient.
- Equity ≥ minimum; limited sources ≤ 50%; waiver conditions documented; 90-day working capital rule if waived.
- Pro forma balance sheet, ratios, 12-month working capital analysis.
- Maturity ≤ 10 years (or blended/special purpose rules); no balloon.
5. Secure
- Liens on all acquired assets, licenses; vehicles per $20,000 rule.
- Fully secured analysis; personal real estate on shortfall (25% equity threshold, 150% cap).
- Line of credit day-one 20-50% rule if first lien on trading assets; no piggyback.
- Guaranties by post-sale ownership; selling owner < 20% two-year guaranty; spouses; trusts.
- Life insurance decision; hazard and liability insurance.
6. Document
- Purchase agreement with all schedules and amendments.
- Seller financials 3 FYs and interims ≤ 120 days, signed/certified.
- Standby agreements (Form 155) with notes attached; Form 159 for agents.
- Seller consulting agreement ≤ 24 months; no earnout; rebate terms.
- Terms of all other debt and equity reviewed.
- Management agreement reviewed (if applicable).
- Credit memo complete (see memo checklist).
How reviewers read the memo
A credit memo for an acquisition is read at least twice: by the lender's approval authority before the loan is made, and possibly years later by SBA if the loan defaults and the lender asks SBA to honour the guaranty. The second reader doesn't know the deal and can't call the loan officer. Every judgment in the memo should therefore be written so a stranger can follow it: what the rule is, what the lender found, and why the lender concluded the rule was met. "DSC is adequate" is a conclusion; "DSC is 1.34x on QoE adjusted EBITDA of $612,000, after a $40,000 reserve for deferred fleet maintenance identified in the QoE" is evidence.
Five sentences that strengthen almost any acquisition memo
- "This transaction is classified as [type] because [specific facts], documented in [exhibit]."
- "The Business Purchase Price is $[x], being the contract price of $[y] less the appraised value of owner-occupied real estate of $[z]."
- "The valuation by [credential holder], engaged by the lender, concludes $[x], which supports the Business Purchase Price; the financial information relied on was verified against IRS transcripts on [date]."
- "Equity of $[x] is [y]% of total project cost, from [sources], with limited sources of $[z] within the half cap; standby agreements are attached."
- "The seller will consult for [n] months under a fixed-fee agreement within the 24-month limit, and holds no ownership, office or employment after closing."
Each sentence ties a requirement to a number and a document, which is exactly what a later reviewer looks for.
Writing the memo this way takes a little longer the first time and saves far more when credit, closing or SBA asks a question months later.
Keep exhibits numbered and referenced from the memo so a reviewer can go straight to the evidence for each statement.
See the SOP 50 10 8.1 change-of-ownership pillar for the underlying rules.
Common questions
Does a PLP lender submit the credit memo to SBA?
Not up front. Under PLP the lender keeps the memo and documentation in its file; SBA reviews them in oversight or when the lender requests guaranty purchase.
Where should the valuation analysis go?
The SOP requires discussion and analysis of the business valuation supporting the purchase price in the credit memo for a change of ownership.
How detailed do adjustments need to be?
Each adjustment needs an explanation of why it's prudent, necessary and supported by ongoing operations. Unsupported adjustments are ineligible for meeting DSC.
Can I print this?
Yes. Use your browser's print function; the checkboxes print as empty boxes.
Does this replace the SOP?
No. It's a working aid based on SOP 50 10 8.1 with technical updates. Always check the current SOP and notices.
Related guides
Sources
This guide explains rules and practice in plain English. It isn't legal, tax or credit advice, and SBA and IRS rules change. Check the current SOP, regulations and your lender's requirements before you rely on anything here. Examples with made-up businesses are illustrations, not real deals.