For SBA lenders
Short answer
An arm's length transaction between related parties for a 7(a) loan means the terms, including the purchase price, are fair and consistent with what would be negotiated between unrelated, independent parties. This requires heightened scrutiny and often an independent business valuation.
When a change of ownership involves related parties (e.g., family members, existing partners, or affiliated businesses), the SBA requires assurance that the transaction is conducted on arm's length terms. This means the purchase price, seller note terms, and other deal elements must reflect fair market value and common business practices. Lenders must conduct additional due diligence, which typically includes an independent business valuation by a qualified appraiser, to substantiate the purchase price and ensure there are no preferential terms that could jeopardize the business's future viability or the SBA's interest.
A lender is underwriting a 7(a) loan for a son acquiring his father's business. To ensure an arm's length transaction, the lender requires an independent business valuation to confirm the purchase price is fair market value. Additionally, any seller note from the father must be on full standby and adhere to standard market terms for such a financing arrangement.
13 CFR Part 120 — Business Loans
Office of the Federal Register · Federal regulation
SOP 50 10 - Lender and Development Company Loan Programs
Last checked 2026-06-13. Official sources control — verify before relying on any rule for a live deal.
Last reviewed 2026-06-13 · SBA sources checked through 2026-06-13. DealRoom analysis of public SBA 7(a) lending records (FY2020–present). Grounded in the current SBA rulebook; verify against the official sources above before relying on it for a live deal. Not legal, tax, or financial advice, and not an approval decision.
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