New SBA Rules Tighten Multi-Unit Franchise Acquisitions

The Small Business Administration's updated lending procedures take effect October 1, and they change the math on buying franchised units. Acquisitions now make up the largest share of SBA loans, and the agency is adding guardrails to cut its risk on those deals.

What changes on October 1

Initial acquisitions and owner buyouts must now show a debt-service coverage ratio of 1.25 to 1, up from 1.15. Expansion acquisitions keep the 1.15 threshold but carry a new 10 percent equity injection that lenders can reduce or waive, and the buyer cannot show negative net worth. Any deal above $3 million requires a quality of earnings report, which means forensic accounting on three years of financials.

Why multi-unit operators feel it most

Portfolio purchases are the deals most likely to clear $3 million, so the earnings report becomes a fixed cost of scaling through acquisition. Lenders expect the tighter coverage rules to slow operators moving from one unit to two or three, since each added store has to prove more cash flow cushion before it gets financed.

Sellers and ownership rules shift too

Sellers can now stay on as consultants for up to two years, up from 12 months, but the SBA wants the buyer running the business, not the former owner. The agency also narrowed eligible borrowers to U.S. citizens and U.S. nationals with a principal residence in the country, a change franchise sales teams need to reflect in candidate screening.

A possible offset on size standards

A separate SBA proposal would redefine small business size for restaurants from revenue caps to an 850-employee limit, adding roughly 5,000 restaurant companies to the eligible pool. Home services, child care, hotel and convenience store categories are also affected. Public comment now runs through November 20, so franchisors should model which of their larger operators could gain SBA access if the rule is finalized.