The U.S. Small Business Administration’s implementation of SOP 50 10 8, effective June 1, 2025, brings significant changes that directly impact Entrepreneurship Through Acquisition (ETA) transactions. For lenders, buyers, and investors involved in small business acquisitions, understanding these new requirements is essential for structuring compliant and successful deals.
What is ETA and Why These Changes Matter
Entrepreneurship Through Acquisition (ETA) has become an increasingly popular path for entrepreneurs to acquire established small businesses rather than starting from scratch. These transactions typically involve sophisticated financing structures, passive investors, and complex ownership arrangements that must now navigate stricter SBA requirements. The changes in SOP 50 10 8 directly address several practices that have emerged in the ETA space, particularly around search funds and passive investor arrangements. The SBA has taken a more definitive stance on what constitutes eligible business structures and financing arrangements.
SOP 50 10 8 and the ETA Landscape: Key Changes and Impacts
The latest SOP update introduces several critical changes that fundamentally alter how ETA transactions can be structured and financed.
Search Fund Prohibition and Control Requirements
The SBA has explicitly addressed search fund structures, stating that businesses entering agreements that give non-guarantor owners/investors control of the business are ineligible. This directly targets common ETA structures where investors purchase less than 20% ownership to avoid guaranty requirements or where side agreements give effective control to passive investors despite minority ownership.
The key is the word “control”; a passive investor with no control of the business is still eligible. The SBA defines what constitutes a lack of “sole discretion” by a third party, requiring the applicant to have “meaningful oversight,” including approving budgets, significant expenses, control over bank accounts, and oversight of employees. The new SOP notes,
“Businesses that have entered into an agreement for control (including a side agreement), that gives a non-guarantor owner/investor control of the business, are ineligible.” All parties must be able to clearly demonstrate that the entrepreneur maintains actual operational control of the business, not just nominal control while investors make key decisions through side agreements.
Partial Changes of Ownership
Perhaps one of the most significant updates involves partial changes of ownership, which were not previously addressed in this manner. These changes make structuring a partial acquisition very challenging. This is particularly noteworthy because partial changes of ownership can be better for the business and strengthen the credit since the seller remains involved and has an equitable interest in the company moving forward.
The new SOP language states:
“For partial changes of ownership: Both the Operating Company and any new direct and/or indirect owner (including individuals and entities) who is acquiring any direct and/or indirect ownership interest in the Operating Company must be Co-Borrowers on the new loan, regardless of the percentage of ownership being acquired. This applies only to new owners who did not have ownership in the business until the partial change of ownership. For example, a Person who will be a new owner and who is gaining 1% direct and/or indirect ownership in the Operating Company must be a Co-Borrower.”
This new requirement essentially eliminates the viability of using minority passive investors or traditional search funds for partial changes of ownership, as even a 1% owner must become a co-borrower on the loan. The SOP also makes multi-step partial changes of ownership ineligible.
Equity Investment Restrictions
The SOP clarifies that equity investments subject to agreements requiring repayment or distributions prior to guaranty release will be considered debt, not equity. This impacts common ETA structures involving redeemable preferred stock, investor agreements with early recovery provisions, or other structures designed to prioritize investor returns. Entrepreneurs and investors must be prepared to provide comprehensive documentation proving all equity injections are genuine equity without repayment obligations.
This includes providing supporting bank statements, wires/checks, and any other documentation needed to properly source the funds, as is now required by the updates to equity injection requirements.
Complete and Enhanced Ownership Disclosure
SBA lenders must now enter 100% of both direct and indirect owners into E-Tran, eliminating any previous flexibility in ownership reporting. This ensures complete transparency in complex ETA ownership structures. Lenders must implement more rigorous processes to evaluate and document these sophisticated structures.
Investors must be prepared to disclose direct and indirect ownership of entity owners, all EINs/SSNs associated with an investor, answers to certain SBA application questions, and other personal information to submit the application to the SBA.
Enhanced Citizenship and Residency Requirements
New language requires that all direct and indirect owners and guarantors must have primary residence in the United States, its territories, or possessions. For ETA transactions involving international investors or buyers, this creates additional compliance hurdles that must be carefully navigated and may require restructuring deals.
Your Expert Partner in a New ETA Landscape
The changes in SOP 50 10 8 fundamentally alter the landscape for ETA financing, placing a significant due diligence burden on lenders to scrutinize complex ownership structures, investor control agreements, and equity sources. The prohibition of common search fund practices and new rules governing partial changes of ownership require a new level of underwriting expertise, but you do not have to face this challenge alone.
This is where Windsor Advantage becomes a critical partner. With more than 150 years of cumulative SBA lending experience, our team has the deep expertise required to give you confidence when evaluating and structuring complex ETA transactions under the new rules. We provide banks, credit unions, and CDFIs with a comprehensive outsourced SBA 7(a) and USDA lending platform, built on cutting-edge technology and rigid, consistent processes.
For lenders facing the challenge of identifying prohibited control structures or verifying the permanence of equity investments, Windsor Advantage acts as an extension of your team. We ensure every acquisition loan is analyzed with the highest level of diligence, mitigating the significant risks associated with the new ETA guidelines and allowing you to continue serving the acquisition entrepreneurship market thoughtfully and profitably.
The ETA space will need to adapt quickly to these new requirements, and we’re committed to helping our bank and credit union partners understand how to evaluate and structure compliant acquisition transactions under the new guidelines. For specific questions about ETA transaction structuring or compliance under the new SOP, please reach out to [email protected].
Stay Informed with Windsor’s SBA Alerts
Stay up to date on the latest news and tips for SBA lenders. Subscribe to the Windsor Advantage Newsletter.