The 1.25 DSCR Rule in the SBA SOP 50 10 8.1 Update
The SBA's SOP 50 10 8.1, which took effect on October 1, 2026 and replaced SOP 50 10 8, raised the minimum debt service coverage ratio for initial business acquisitions and owner buyouts to 1.25 and requires it to be measured on historical cash flow rather than projections. Under the previous SOP, the standard was 1.15, and lenders could support a loan with projected results, so the update tightens the test on both the threshold and the method. For a buyer, that means the business's past performance now sets the ceiling on how much you can borrow.
Historical cash flow under the update means the business's last fiscal year or the average of its last two fiscal years, adjusted by the lender for items such as owner compensation and one-time expenses. Lenders can still review your projections to understand the business plan, but projections cannot carry a loan that the historical numbers do not support, which matters most for a business that is growing quickly or recovering from a weak year.
Business expansions keep the lower 1.15 threshold, but only when the buyer is an existing business that has operated for at least two full fiscal years under its current ownership, buys 100 percent of the target, stays in the same four-digit NAICS industry group and keeps at least as many full personal guarantors. A deal that misses any of those tests does not get the lower threshold. Owner buyouts, where an existing owner buys out partners, and purchases by employee stock ownership plans or cooperatives follow the 1.25 standard along with initial acquisitions.
The difference between the two thresholds is large in dollar terms, as a simple example shows. Take a business with $400,000 a year of historical cash flow available for debt service, financed at an illustrative 10 percent rate over 10 years. At 1.25 coverage, annual debt service can be no more than $320,000, which supports a loan of roughly $2.02 million, while at 1.15, the same business could support about $2.19 million, so the update removes roughly $175,000 of borrowing capacity from that deal.
The term matters as much as the ratio, because the update generally limits the business portion of a change of ownership loan to 10 years, while any real estate in the deal can run longer through a blended term or a separate loan. SBA's September 2026 technical update added an exception that can matter for care facilities, allowing a longer term when the business is bought together with owner-occupied special-purpose real estate that depends on it, so ask your lender whether your deal qualifies. A shorter term means a higher annual payment for the business portion, and that payment is what the 1.25 test measures.
Seller debt that is not on full standby counts in the coverage calculation, and when such a note carries interest-only payments, lenders have to measure it as if it amortized over no more than 10 years. A seller note with interest-only payments for five years can therefore weigh on your coverage far more heavily than its actual payments suggest.
On larger deals, the earnings in the test come from a quality of earnings report rather than the seller's statements, since initial acquisitions and business expansions with a business purchase price of $3 million or more, not counting owner-occupied real estate, require an independent report under the update. The lender has to use those adjusted earnings when calculating coverage, so any add-backs the report rejects come straight out of your borrowing capacity.
Turnaround deals feel the change most, because a buyer planning to fill an assisted living facility that ran half empty last year, or to rebuild an adult day center's enrollment, can generally no longer finance the plan on the strength of the projected recovery, because the lender has to size the loan on what the business actually earned.
Before you make an offer, ask the seller for the last two fiscal years of financial statements and tax returns, along with year-to-date results, and confirm with your lender which transaction type applies to your deal. Ask how the lender will treat owner add-backs and any seller note, and work out what loan amount the business's history supports at 1.25. If the price only works at the old 1.15 standard or on projected numbers, renegotiate it or bring more equity before you commit.
Knowing the loan the history supports also gives you a concrete number to bring to that negotiation, which carries more weight with a seller than a general concern about coverage. I help business buyers calculate coverage on historical cash flow the way an SBA lender will, including add-backs and any seller note, and build the projections and business plan for the loan package. If you are pricing an acquisition, send the last two years of financials to amer@awadcapitaladvisors.com, and I can help you see what the business can borrow at 1.25.