SBA’s New SOP Clarification: What It Means for Search Funds, Control, and the Future of Main Street Acquisitions

The Small Business Administration (SBA) has released its long-anticipated update to SOP 50 10 7, clarifying long-standing ambiguities around search fund structures, investor relationships, and the distinction between debt and equity in SBA-financed acquisitions.

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While some in the ETA and small business lending communities have celebrated the clarity, a closer look reveals a more sobering reality: this update, while well-intentioned, may have unintended consequences that could stifle entrepreneurship, reduce access to capital, and ultimately harm the Main Street businesses the SBA is designed to support.

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Let’s break down the technical changes, their practical impact, and why this policy shift—while logical in theory—may create significant challenges for the next generation of business owners and the ecosystem that supports them.

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The Core of the SBA’s Update: Control and Equity Redefined

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The SBA’s update focuses on two critical issues:

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1. Control Must Reside with the Operator:
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If an entrepreneur uses an SBA loan to acquire a business, they must maintain operational control and personally guarantee the loan. No side agreements, voting structures, or management contracts can give effective control to investors who are not guarantors. The SBA is drawing a hard line: the person taking the risk must also make the decisions.

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2. Equity Must Be True Equity, Not Disguised Debt:
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Investors who expect guaranteed repayment of capital—before the SBA loan is satisfied—are effectively extending debt, not equity. Structures like redeemable preferred stock, structured payouts, or waterfalls that prioritize investor payback over loan obligations are now prohibited. Only true equity—where investors share risk and upside without guaranteed return—is allowed.

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On paper, these changes make sense. They aim to prevent abuse of the SBA program and ensure it fulfills its mission of empowering entrepreneurs, not enriching passive investors.

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But the real-world implications are far more complex.
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The Case for Investor Involvement: Why the SBA’s View is Too Narrow
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Here’s the heart of the issue: while the SBA’s intent is to protect the integrity of its program, it fundamentally misunderstands the role that investors play in many search fund and small business acquisition deals.

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Most searchers—especially those without prior operating experience—are not ready to step into the CEO seat of a complex, multi-million-dollar business without guidance. Investors don’t just provide capital—they provide mentorship, strategic advice, and a network of support that is often critical to the success of first-time entrepreneurs.

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By prohibiting investors from having any contractual control or protections, the SBA is essentially saying:
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“We’ll back your loan, but you’re on your own. You can’t rely on the wisdom and experience of those who have been there before.”

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This is a flawed view of how entrepreneurship works in the real world. Business ownership, especially through acquisition, is not a solo sport. It’s a team effort. Investors—particularly in the search fund model—are not predatory financiers looking to extract value. They are partners who walk alongside operators, helping them navigate the inevitable challenges of leadership, growth, and risk.

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By excluding investors from having any real influence, the SBA may inadvertently set up first-time owners to fail. And when businesses fail, the communities they serve, the employees they support, and the wealth they generate are all at risk.

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The Bigger Problem: Deal Sizes Are Rising, but SBA Limits Are Not
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There’s another issue the SBA has failed to address: the economics of small business acquisitions are changing, and the agency’s rigid structures are not keeping up.
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Consider this:
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• The average price of small businesses has been steadily rising.
• Valuations are inflated due to market dynamics, demographic shifts, and competition for quality deals.
• Many Main Street businesses now trade at prices well above the typical SBA loan cap, especially for deals with significant goodwill or real estate components.
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Yet the SBA has not adjusted its loan size limits or equity requirements to reflect this reality. As a result, more and more deals don’t pencil—not because they aren’t good businesses, but because the SBA’s program design hasn’t evolved.

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Combine this with the new restrictions on investor involvement, and you create a perfect storm:
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• Fewer deals qualify for SBA financing.
• First-time buyers lose access to mentorship and capital support.
• Sellers struggle to exit their businesses at fair market value, leading to a backlog of unsellable Main Street companies.
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This is a systemic problem. The SBA’s rigid rules may protect the agency from compliance risk, but they risk choking off the very market the SBA was created to support.
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The Path Forward: A Call for Nuance, Not One-Size-Fits-All Policy
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The SBA’s update is not inherently bad. It clarifies long-needed ambiguities and prevents the worst abuses of the system. But it also reflects a lack of nuance—a failure to recognize that not all investor involvement is predatory, and not all first-time entrepreneurs are ready to succeed without guidance.
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There is a middle ground.
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Instead of a blanket prohibition on investor control and structured returns, the SBA could adopt sensible guardrails:
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• Allow investors limited protective provisions without full operational control.
• Permit structured payouts after certain milestones, as long as they do not jeopardize loan repayment.
• Raise loan size limits or adjust equity requirements to reflect the rising cost of small business acquisitions.
• Recognize that equity risk comes in many forms, and not all preferred structures are abusive.
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In its effort to protect the program, the SBA risks making it inaccessible for many deserving entrepreneurs and unattractive to the investors who are willing to back them.
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Final Thoughts: A System Under Pressure
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The SBA’s updated SOP is a wake-up call for the search fund community, the small business lending ecosystem, and policymakers alike. It reminds us that entrepreneurship through acquisition is a fragile system—one that relies on a careful balance of affordable capital, operator risk, and investor support.
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Without that balance, deals will slow, prices will stagnate, and the next generation of entrepreneurs will find themselves locked out of the very opportunities the SBA was created to enable.
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This isn’t just a technical update. It’s a moment of reflection.
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If we care about the future of Main Street—about helping small business owners retire, empowering first-time entrepreneurs, and preserving the heartbeat of the American economy—we must advocate for policy that reflects the realities of the market. That means welcoming investor involvement in the right ways, modernizing loan limits, and building an SBA program that works for the 21st century.
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The path forward is not to close doors—but to build a system where entrepreneurs, investors, and lenders can work together, with clear rules and shared incentives, to keep Main Street alive and thriving.
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Read the Full SBA update HERE

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