Updated November 13, 2026
Quick answer
If your company has run for two full fiscal years under its current owners and buys 100% of a business in the same four-digit NAICS industry group, SBA treats it as a Business Expansion. Equity starts at 10%, but the lender may reduce or waive it, and the coverage test drops to 1.15 to 1. Axiant Partners, a business-loan broker in Boca Raton, can find lenders that use this. Lenders still set their own terms.
The Three Tests for a Business Expansion
SOP 50 10 8.1, Appendix 15, sets a separate category for an operating company that buys another. To qualify, the lender has to document that:
- Your company has operated two full fiscal years under its current ownership.
- You're buying 100% of the other business. A partial stake doesn't qualify.
- The target is in your four-digit NAICS industry group. That's broader than your exact six-digit code. For example, electrical contractors (238210) and plumbing and HVAC contractors (238220) both sit in group 2382, Building Equipment Contractors.
The deal must also leave at least as many full personal guarantors as your company had before. Miss any test and the purchase becomes an Initial Acquisition, with a 10% minimum that can't be waived and a 1.25 coverage test. The business acquisition financing guide covers the other ways to fund a purchase.
Can You Buy a Competitor With No Money Down?
Sometimes. The SOP's minimum is still 10% of total project cost, but for a Business Expansion the lender may reduce or eliminate it if it decides your company has enough liquidity and working capital to keep operating after the deal. Your balance sheet can't show negative net worth at the last fiscal year-end. It's the lender's call, not an SBA entitlement, which is why one lender asks for 10% and another asks for nothing.
Two strings come with a waiver:
- No working capital on top. The lender can't add dedicated permanent working capital to this or any other 7(a) term loan within 90 days. Any working capital the deal needs has to come from your cash or a line of credit. A de minimis leftover is allowed, up to the greater of $10,000 or 0.5% of the loan.
- You're judged on your own balance sheet. The waiver rests on your company being adequately capitalized, so thin cash or heavy existing debt tends to bring the 10% back.
Why the 1.15 Coverage Test Matters
An Initial Acquisition needs earnings of at least 1.25 times the debt payments; a Business Expansion needs 1.15. The lender may also adjust cash flow for savings the combination creates, and may combine both companies when the target keeps operating separately. Projections can be reviewed but can't be used to meet the test.
Here is what $300,000 of available annual cash flow supports at each ratio, assuming 10.5% over 10 years (illustrative, not a quote):
| Coverage required | Most annual debt service | Largest loan it supports |
|---|---|---|
| 1.25 (Initial Acquisition) | $240,000 | $1,482,195 |
| 1.15 (Business Expansion) | $260,870 | $1,611,082 |
Same earnings, about $128,887 more loan.
Worked Example: An HVAC Company Buys an Electrical Contractor
Illustrative, not a quote; every loan is subject to approval. An HVAC contractor with four years under its owners buys 100% of an electrical contractor for $1,200,000. Same NAICS group (2382), so it's a Business Expansion. The lender's valuation supports the price, the buyer has ample cash and no negative net worth, so the lender waives the equity.
| Item | Amount |
|---|---|
| Purchase price | $1,200,000 |
| Equity from the buyer | $0 (waived by the lender) |
| Assumed rate and term | 10.5%, 10 years (acquisition loans amortize over 10 years at most) |
| Monthly payment | About $16,192 |
| Annual debt service | About $194,306 |
| Cash flow needed at 1.15 | About $223,452 |
Closing costs and the SBA guaranty fee, which the FY2027 fee notice sets at 3.5% of the guaranteed share up to $1 million, are usually financed on top. Because the equity was waived, the working capital to absorb the new crews comes from the company's cash or a line of credit.
What Else Still Applies
- Valuation. An accredited business valuation for the lender, and a Quality of Earnings report if the price is $3 million or more. Debt is capped at the valuation.
- The seller leaves. Unlike a partner buyout, the seller can't stay as owner, officer or employee, only as a consultant for up to 24 months.
- Borrower structure. Your company is the borrower; if the target stays a separate entity, both are co-borrowers.
- Lender appetite. Many SBA lenders still pass on gas stations, restaurants and bars and some other industries. See businesses SBA lenders often decline.
Buying something outside your industry group, or not buying all of it? Then the equity and seller note rules for an Initial Acquisition apply. For deals near the $5 million cap, see large acquisition loans.
Talk to an SBA specialist: (561) 268-0465, or get matched with acquisition lenders.
Frequently Asked Questions
Can I buy a competitor with an SBA loan and no down payment?
Possibly. If it qualifies as a Business Expansion, the lender may reduce or eliminate the 10% equity when your company has enough liquidity and working capital and no negative net worth. Lenders decide case by case.
What counts as the same industry for a Business Expansion?
The same four-digit NAICS industry group, not the exact six-digit code. For example, electrical and HVAC contractors are both in group 2382.
How long must my business have operated?
At least two full fiscal years under its current ownership. Otherwise the purchase is an Initial Acquisition.
Can I buy part of a competitor with a Business Expansion loan?
No. The rule requires buying 100% of the ownership interest. A partial purchase falls under other categories.
What debt service coverage do lenders need for a Business Expansion?
At least 1.15 to 1 under SOP 50 10 8.1, against 1.25 for an Initial Acquisition. Lenders often want more.
Can the owner of the business I'm buying stay on?
Not as an owner, officer or employee. The seller may consult for up to 24 months in total.
Sources & Further Reading
- SBA SOP 50 10 8.1, Appendix 15: 7(a) Changes of Ownership (effective October 1, 2026) — Transaction types, equity injection by type, seller debt and standby rules, valuation, Quality of Earnings, debt service coverage and collateral for acquisitions.
- U.S. Census Bureau: NAICS 2382, Building Equipment Contractors — The four-digit industry group that holds electrical (238210) and plumbing/HVAC (238220) contractors.
- NAGGL: FY 2027 7(a) and 504 fee notices — Summary of SBA Information Notice 5000-881797, the 7(a) upfront guaranty fees effective October 1, 2026.
- SBA 7(a) Loans — Program overview and the $5 million maximum loan amount.
Figures above describe ranges commonly seen across lenders and reflect published guidance as of the date on this page. Confirm current terms with the cited source or your lender before acting.