SBA 7(a) Home Services Acquisition Underwriting Model

What the current SBA page establishes

SBA describes 7(a) as its primary business-loan program. The current public page lists complete or partial changes of ownership, working capital, equipment, furniture and real estate among permitted uses, states a $5 million maximum loan amount, and says the borrower works directly with a participating lender. Eligibility includes creditworthiness and a reasonable ability to repay.

This guide does not state a universal equity injection, interest rate, debt-service ratio or amortization. Those depend on current SBA rules, lender policy and the actual transaction. Obtain a written term sheet and ask the lender to identify every material condition.

Do not substitute 504 for a change-of-ownership loan

SBA's public 504 page describes long-term fixed-rate financing for major fixed assets through Certified Development Companies and expressly excludes working capital or inventory. A transaction that includes real estate or long-lived equipment may require advisers to evaluate separate or combined financing, but a 504 description should not be presented as a generic formula for buying business goodwill.

Build sources and uses first

Underwrite earnings, not the seller's add-back total

Start with a source-reconciled quality-of-earnings bridge. Deduct replacement compensation for the seller's required functions, recurring fleet replacement, normalized rent, insurance, software, licenses, marketing and other costs necessary under buyer ownership. Treat buyer synergies separately. Model seasonality and working capital monthly when cash troughs matter.

Debt-service capacity

The companion workbook calculates annual debt service from user-entered amount, rate and term, then compares it with normalized cash flow after defined recurring needs. Use lender-provided assumptions; cells are inputs, not current program quotes. Test a downside case for revenue, gross margin, owner replacement, capex and rates. A base case that barely covers debt service before a downside is not resilient.

Home-services risks lenders and buyers should reconcile

• License or qualifying-person continuity after closing.
• Seller dependence in estimating, dispatch, sales and key accounts.
• Technician concentration and compensation required for retention.
• Fleet liens, age, deferred maintenance and replacement schedule.
• Customer deposits, deferred service agreements and working-capital needs.
• Weather/event normalization and insurance receivable collection.
• Backlog quality, WIP, retainage and cost to complete.
• Lease assignment, related-party rent and facility suitability.

The lender-ready evidence pack

1. Executed or near-final purchase agreement and sources/uses.
2. Three years of filed tax returns and current interim financials.
3. Monthly bridge from filed results to trailing normalized earnings.
4. Balance sheet, AR/AP aging, debt and working-capital schedule.
5. Buyer resume, liquidity and personal financial information requested by the lender.
6. Business plan, transition plan and management/credential coverage.
7. Lease, real estate, environmental, fleet and insurance materials as applicable.
8. Downside case and documented mitigants.

How to use the workbook

Enter only documented transaction assumptions in blue input cells. Review normalized cash flow with the QoE bridge. Compare base and downside debt-service coverage, post-close liquidity and sources-versus-uses check. The workbook is an educational pre-screen, not lender approval, a commitment or financial advice.

Illustrative sources and uses

Model monthly liquidity, not only annual coverage

Build monthly revenue, gross margin, payroll, rent, fleet, taxes, working capital, debt service and one-time transition costs. Identify the lowest cash point under base and downside cases. HVAC seasonality, annual agreement collections, project retainage and storm receivables can make an annual coverage ratio look acceptable while cash fails in a specific month.

Seller debt requires exact treatment

Record principal, rate, payment start, amortization, maturity, standby, subordination, collateral and default terms. Do not assume a seller note counts toward equity or can receive payments during lender debt service. The participating lender must confirm current permitted treatment. Model seller-note payments when they actually begin and include any balloon/refinancing risk.

Buyer and management capability

Connect the buyer's experience to the actual operating plan: technical/license coverage, management, estimating, dispatch, recruiting, financial control and customer relationships. A buyer need not perform every trade function personally, but the plan must identify qualified people, costs and retention. Normalize earnings for those resources before calculating repayment capacity.

Questions for the lender

• Which current SBA procedure and lender policy govern this ownership change?
• How are equity injection and seller debt treated in this structure?
• What amount, rate, term, fees, collateral and guarantees are proposed?
• What financial add-backs and replacement compensation will underwriting accept?
• How much working capital and post-close liquidity must remain?
• What licenses, leases, environmental, insurance or appraisal items are conditions?
• What changes require re-underwriting before closing?

Commitment and closing-condition tracker

List every lender condition, responsible person, required format, due date, submission, reviewer, status and expiration. Track updated interim financials and purchase-agreement amendments. A verbal approval or draft term sheet is not a commitment to fund. Coordinate the lender checklist with legal, license, CBS-1 and digital-transition calendars.

Model liquidity month by month

Start with buyer cash before closing, then deduct equity injection, fees paid outside proceeds, transition cost and required reserves. Add monthly operating cash from a supportable plan and subtract debt service, taxes, working-capital changes, fleet replacement and other maintenance capital. Seasonal HVAC, landscaping, roofing and restoration businesses can pass an annual ratio while running out of cash during a trough or rapid backlog build.

Stress collections, gross margin, technician hiring, seller transition and equipment failure separately so management can see the cause of a shortfall. State which responses are actually available: unused cash, a line of credit, delayed discretionary spending or additional capital. Do not assume a lender will fund an uncommitted facility after closing.

Control changes after underwriting begins

Route purchase-price changes, seller-note amendments, new debt, lease changes, ownership changes and material interim performance through the lender before signing or closing. Maintain one current sources-and-uses schedule that ties to the purchase agreement, commitment and funds flow. Version differences are a common source of preventable closing delays.

Match the rate and payment period

A hypothetical $1,475,000 loan at 10% nominal annual interest and ten-year amortization produces about $19,492.23 per monthly payment and $233,906.80 of payments in the first twelve months. Annual payments at the same nominal annual rate instead produce $240,049.46 per year. The difference comes from timing; specify the schedule rather than using annual-period PMT for an unlabeled loan.

A $100,000 seller note at an illustrative 8% with five-year monthly amortization adds about $24,331.67 of first-year payments if it begins in month 1. Combined first-year service in that example is about $258,238.48. With $300,000 defined cash available, coverage is approximately 1.162×. This is arithmetic, not an SBA approval standard. Delayed starts and balloons require their own schedules.

Use the debt and cash-flow tool or revised workbook to include every note and a twelve-month liquidity schedule. The seller-financing guide explains how timing, accrual and maturity change the comparison.

Sources and scope

Source links support the specific topics noted. Examples and analytical frameworks are illustrative; confirm current requirements and transaction facts with the responsible advisers.

1. US Small Business Administration - 7(a) Loans
   Current public program uses, maximum amount, eligibility and application path.
2. US Small Business Administration - 504 Loans
   Current public fixed-asset purpose and excluded uses.