A Market Correction in Disguise: How New SBA Rules Will Reshape Small Business Ownership
On June 1, 2025, two major SBA loan rules will go into effect that could significantly reshape the small business acquisition landscape:
Mandatory 10% Equity Injection – Buyers must contribute at least 10% equity into the deal. Seller financing only counts if it’s on full standby for the entire loan term (typically 10 years).
Borrower Experience Requirement – SBA lenders must now verify that buyers have direct, relevant experience in the sector of the business they are buying. The days of “learn it after close” are over.
The Small Business Administration (SBA) implemented these significant policy revisions in 2025 to address financial instability and rising default rates within its 7(a) loan program. The primary reasons for these changes include restoring financial discipline and ensuring buyers are truly equipped to operate the businesses they acquire. These aren’t minor policy tweaks. They mark a return to fundamentals—after several years in which relaxed rules flooded the market with first-time buyers, many of them armed with SBA leverage but little operational background. What followed was a boom in search funds, rising prices, and a surge in early-stage loan defaults.
The impact of the new rules will be immediate:
Reduces buyer pool: Many first-time buyers—especially search funders and corporate professionals—will no longer qualify.
Normalizes valuations: Fewer eligible buyers = lower demand = downward pressure on pricing.
These two requirements alone will shrink the casual buyer pool and re-center the market around serious, qualified operators. And while some may view these changes as restrictive, they’re more likely to be a healthy correction—favoring experience, restoring stability, and reintroducing long-term thinking into small business ownership.
The 2023 SBA Shift That Changed Everything
To understand where we’re headed, you need to understand what happened in 2023. In an effort to expand access to capital, the SBA made several changes to its 7(a) loan program:
Introduced the “Do What You Do” underwriting rule, allowing lenders to use their own credit standards instead of SBA’s.
Relaxed equity requirements, especially for deals under $500K.
Streamlined credit criteria—reducing nine historic underwriting factors to just three basic inputs.
In practical terms, this meant you no longer needed to have experience in the sector of the business you were buying. And in many cases, you didn’t even need to put up much money. The SBA had essentially removed two of the biggest guardrails in business acquisition: relevant experience and meaningful skin in the game.
The Search Fund Surge: Easy Money, Inexperienced Operators
This rule change lit a fire under the “acquisition entrepreneurship” movement—especially the rise of search funds. A search fund is an investment vehicle created by an individual—usually with an MBA or finance background—to raise a small pool of capital to find, acquire, and operate a single small business. The goal is often to buy a profitable, owner-operated company, step in as CEO, and grow it over time. Most search funders have little to no direct operational experience in the industries they target. These funds increasingly relied on SBA loans as their primary source of acquisition capital, using government-backed financing to acquire businesses with minimal equity down—sometimes contributing as little as 5% of the purchase price out of pocket.
According to Stanford’s 2024 Search Fund Study:
94 traditional search funds were launched in 2023, the highest number in the model’s 40-year history.
Nearly 80% of new searchers were under the age of 35, many with limited (or no) operational experience.
Buying a $2 million plumbing company with $100K out of pocket was now not just possible—it was easy. Business influencers on YouTube and TikTok flooded the internet with content: “How I bought a business with no money,” “Why I didn’t need to know the industry,” “How to use SBA debt to quit your job.”
It worked—until it didn’t.
The Hangover: Defaults, Valuations, and a Jammed-Up Market
When people who have never managed teams, led service technicians, or worked in the sector of the business they were buying start running operations, problems emerge fast.
According to the SBA:
Loan defaults rose from $570M in 2021 to $1.6B in 2024.
Early-stage defaults (within 24 months of closing) tripled between 2022 and 2024.
These defaults weren’t flukes—they were the result of a system that rewarded access over experience. And while some sellers found a quick and lucrative exit, many of those businesses were soon under stress, especially when the new owner struggled to lead. At the same time, the surge in buyer demand inflated valuations across the board. Multiples rose not because businesses were improving—but because more buyers, backed by leverage, could afford to overpay. Even private equity firms joined the frenzy. Many bought businesses at the top of the market, hoping for continued growth or quick flips. But now, with fewer SBA-qualified buyers and tighter capital markets, many are sitting on assets they can’t exit at the same price they paid.
Why This Benefits Sellers in the Long Run
Yes, the pool of buyers will shrink—but that’s not necessarily a bad thing for business owners looking to sell. With stricter requirements in place, sellers are more likely to engage with buyers who are truly qualified—people who have worked in the sector, understand the day-to-day realities of the business, and are prepared to take care of the team, the customers, and the reputation that’s been built over decades.
Here’s why that matters:
Higher deal certainty: Experienced buyers are more likely to close, and less likely to stumble in diligence, financing, or early operations.
Better post-close outcomes: Employees, clients, and vendors are more likely to thrive under a buyer who understands the business.
Preserved legacy: Many owners care deeply about what happens to the company after they leave. The new rules increase the odds that the next chapter is written by someone capable of honoring what came before.
These deals may take longer—but they’re more likely to stick, succeed, and reflect the seller’s values.
Why This Aligns With Our Strategy at Legacy
At Legacy Holdings, we’ve always believed small businesses should be acquired and run by people who know the work—not just people who know how to structure a deal.
We partner with essential service businesses—companies that require operational fluency, not just capital.
Our regional teams are made up of experienced operators in the fields of the companies we are interested in partnering with, so that we can add value from day one. These are not financial tourists—they’re career professionals looking to own, grow, and improve the kinds of companies they already understand.
The SBA’s shift isn’t a challenge to our approach—it’s confirmation that our philosophy is the right one for the long haul.
In Summary: A Return to Real Ownership
The SBA’s new rules are more than policy—they’re a signal that the small business market is ready to grow up again.
They will:
Reduce noise by filtering out unqualified buyers
Normalize valuations by reducing artificially inflated demand
Restore operational stability by ensuring experienced owners are in charge
This isn’t about making it harder to buy a business. It’s about making sure the people who do are prepared to run it well. And that’s good for sellers, employees, customers—and the long-term health of the entire small business ecosystem.