What Uber, taxi medallions, and changing Small Business Administration lending requirements teach us about business value.
Imagine owning a New York City taxi medallion in 2013. For decades, that medallion represented something valuable: the right to operate a yellow taxi in a market where the number of medallions was tightly controlled.
Medallions traded for extraordinary prices, in some cases exceeding $1 million. Buyers weren’t simply purchasing a license. They were purchasing access to a business protected by significant barriers to entry.
Then Uber arrived.
Suddenly, customers could request a ride from their phones without hailing a cab. Technology changed how transportation services were delivered, and evolving regulations allowed new competitors to challenge the traditional taxi industry.
The result was devastating for many medallion owners. Values plummeted, leaving some owners with loans exceeding the value of their assets.
The medallions hadn’t changed. The economics of owning one had.
Sometimes the rules change, and the value of a business changes with them.
Today, buyers, sellers, lenders, and business valuation professionals are confronting another set of changing rules—this time involving Small Business Administration (SBA) financing.
Two areas deserve particular attention: cash flow available to service acquisition debt, and the role of quality of earnings analysis.
Now Offering Quality of Earning Reports
Art of Business Valuation is pleased to announce we are now able to prepare Quality of Earnings reports for all our SBA lenders with the addition of Trisch Garthoeffner, ABV, CVA, MAFF, EA, MAcc to our team. Trisch brings over 20+ years experience in business valuation, financial forensics and M&A advisory.
Two SBA Changes That Can Affect the Price of a Business
Effective October 1, 2026, SBA Standard Operating Procedure (SOP) 50 10 8.1 introduced important changes affecting many business acquisitions financed through the SBA 7(a) loan program.
1. Cash Flow Must Do More Than Cover the Loan Payment
The updated SBA guidelines increase the minimum debt service coverage ratio (DSCR) for many acquisitions from 1.15 to 1.25. In simple terms, a qualifying acquisition generally must demonstrate $1.25 in operating cash flow for every $1.00 of required annual debt service. Certain business expansion transactions remain subject to a 1.15 ratio. The rules also require using historical cash flow from either the last year, or the last two years averaged, and eliminate using projections for this purpose.
Consider a hypothetical business generating $250,000 in qualifying annual operating cash flow.
| Illustrative comparison | 1.15x coverage | 1.25x coverage |
|---|---|---|
| Maximum annual debt service | $217,391 | $200,000 |
| Loan amount at closing (10-year amortization, 10.00% interest) | $1,371,000 | $1,261,000 |
At the same assumed interest rate and repayment term, the higher coverage requirement reduces illustrative loan proceeds by approximately $110,000. That can affect the price a buyer can finance.
A seller might believe the business is worth $2 million based on historical earnings and comparable transactions. But if a prospective buyer cannot obtain enough financing to pay that amount, the seller may need to reconsider the price, financing structure, or target buyer.
A business can be worth a certain amount under a valuation methodology yet still be difficult to sell at that price under prevailing financing conditions.
2. Quality of Earnings — Proving the Profits Are Real
For qualifying initial acquisitions and business expansions with a business purchase price of $3 million or more, excluding qualifying owner-occupied real estate, the updated SBA procedures require an independent quality of earnings (QoE) analysis in addition to the business valuation.
This is significant because business owners and buyers sometimes have different views of what a company actually earns.
A seller might point to $600,000 in adjusted annual earnings after adding back personal expenses, unusual costs, and other adjustments. But how much of that $600,000 is recurring, verifiable, and available to a new owner?
A quality of earnings analysis examines the reliability and sustainability of reported earnings, including the support for proposed adjustments. One of the most stringent requirements is tying all approximately two and a half years of bank statements into the financial statements. If records are in poor shape this can be quite tedious. (We recommend any business with a likely sales price over $3 million begin to obtain reviewed financial statements by an outside accountant. This alone will make your business more salable.)
Suppose the analysis determines that only $450,000 of the seller’s claimed $600,000 in adjusted earnings is supportable. That difference could materially affect the buyer’s financing capacity and the price the buyer is willing or able to pay.
Importantly, a quality of earnings analysis is not the same as a business valuation. The former examines the quality and sustainability of earnings, while the latter develops an opinion of value based on the applicable standard of value and valuation methodologies. Both can play important, complementary roles in an acquisition.
What Does This Mean for Business Owners?
The taxi medallion story illustrates how an external change can undermine assumptions that once supported substantial business value.
The SBA lending changes present a different, more nuanced situation. They do not automatically make businesses less valuable. But they may change the economics of acquiring certain businesses, particularly those whose buyers depend on SBA financing.
And for buyers, sellers, CPAs, attorneys, business brokers, and lenders, understanding these requirements and doing proper due diligence early in the transaction process may help avoid unpleasant surprises after months of negotiations.
The Bottom Line: Value Doesn’t Exist in a Vacuum
As taxi medallion owners discovered, outside forces can reshape an asset’s economic value. Similarly, SBA financing requirements can affect the prices buyers can support—even when a company’s operations remain strong.
A credible valuation considers expected cash flow, risk, and market conditions, not just last year’s earnings. At Art of Business Valuation, we focus on these factors to develop well-supported opinions of value and help owners and advisors make informed decisions.