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Search Funds & SBA Loans: What Just Changed in the New SOP (And How to Stay Eligible)
Search funds have become one of the most popular pathways for aspiring entrepreneurs to acquire cash-flowing small businesses. But with the latest SBA SOP update, confusion spread quickly—especially after click-bait posts on LinkedIn claiming “Search Funds Are Dead.”
They’re not dead. But the rules did change, and if you don’t structure your deal properly, your loan can be denied—sometimes late in underwriting when you’ve already invested time and money.
Below is a clear breakdown of what the SBA actually changed, what’s still allowed, what’s now banned, and how to keep your search fund acquisition fully SBA-eligible.
What Is a Search Fund (In Simple Terms)?
A search fund is a model where entrepreneurs raise capital from investors to search for and buy an existing small business—usually one with stable cash flow and an established operation.
There are two key components:
- Investors who provide capital
- Searchers who find, acquire, and operate the business
This model has grown rapidly, attracting sophisticated investors and elite MBA programs. But increased popularity also means increased scrutiny—especially from the SBA.
The New SBA SOP Update: What Actually Changed
Contrary to the online panic, search funds are still eligible for SBA financing.
However, the SBA is now enforcing two major restrictions with far more clarity and strictness:
🚫 1. Loss of Control Is Prohibited
This isn’t new—but the SBA is tightening enforcement.
If the entrepreneur (the borrower) does not have full operational control, the loan is automatically ineligible.
Not allowed:
- Side agreements giving control to investors
- Voting structures that dilute the borrower’s authority
- Situations where investors can override the operator
The SBA requires the borrower to be the 100% operational decision maker and the personal guarantor on the loan.
🚫 2. Equity That Acts Like Debt Is No Longer Permitted
This is the big one causing confusion.
Some investors tried to structure “equity” with repayment terms that looked like debt—guaranteed payouts, required returns, or redemption clauses.
That structure is now explicitly banned.
Not allowed:
- Preferred equity with mandatory payouts
- Investor agreements requiring redemption or repayment
- Any structure that mimics a loan to investors
What Is Allowed in Search Fund SBA Deals?
The SBA is still supportive of search funds—as long as the terms reflect true equity.
Allowed:
- Discretionary profit-sharing
- Dividends based on performance
- Investors receiving returns only when the business produces profits
- Operator (borrower) maintaining full control
- Clean, simple agreements with no hidden side letters
This means investors must actually take equity risk, not guaranteed repayment.
Why This Matters: Avoid Deal-Killing Mistakes
One wrong clause can kill a deal—even late in underwriting.
That means:
- Weeks of due diligence wasted
- LOIs expiring
- Deposits potentially at risk
- Sellers losing confidence
To avoid this, borrowers should:
Best Practices
- Review all investor agreements with an SBA-savvy attorney
- Keep the structure clean and simple
- Make sure equity is truly equity—no backdoor debt terms
- Ensure the operator maintains full control and signs as guarantor
Will the SBA Tighten Rules Even More?
Possibly.
Beau Eckstein predicts heavier scrutiny in the coming months, especially for professional institutional search funds. This, however, creates new opportunities for smaller investors and first-time searchers who structure deals cleanly.
Where big PE-backed search funds may hit roadblocks, smaller independent operators may thrive.
Need Help Structuring Your SBA Search Fund Deal?
Whether you're pursuing:
- an SBA 7(a) acquisition
- a larger deal with a 7(a)/conventional pari passu structure
- or exploring USDA or SBA 504
…Beau and his lender network specialize in helping buyers get deals funded—even complex ones.