New SBA Quality of Earnings Requirements
Published on by Joe Conover in Transaction Advisory, Assurance
- New SBA requirements mandate an independent Quality of Earnings (QoE) report for qualifying business acquisitions of $3 million or more.
- A QoE report goes beyond a traditional business valuation by evaluating the reliability and sustainability of earnings, cash flow, and revenue.
- QoE findings can directly affect SBA financing decisions by influencing debt service coverage calculations and loan structure.
- Early preparation can help buyers, sellers, and lenders avoid delays by addressing financial documentation and due diligence requirements before closing.
The U.S. Small Business Administration (SBA) has introduced new financial due diligence requirements for certain business acquisitions. Effective October 1, 2026, SBA Standard Operating Procedure (SOP) 50 10 8.1 requires lenders to obtain an independent Quality of Earnings (QoE) report for qualifying acquisitions with a business purchase price of $3 million or more.
The change adds another step to the lending process, making it important for business buyers, sellers, and SBA lenders to understand the requirements before moving forward with a transaction.
Which SBA loans require a quality of earnings report?
Under the updated guidance, lenders must obtain an independent QoE report, in addition to a business valuation, for two types of transactions:
- Initial acquisitions: Purchases of an existing business.
- Business expansions: Qualifying acquisitions of another business by an existing business.
The requirement applies when the business purchase price is $3 million or more, before deducting buyer equity contributions, seller financing, or other financing sources. The appraised value of owner-occupied commercial real estate is excluded when determining whether the transaction meets the threshold.
Certain transactions are exempt, including owner buyouts, Employee Stock Ownership Plan (ESOP) and cooperative transactions, and qualifying acquisitions involving owner-occupied special purpose properties.
What does a quality of earnings report evaluate?
A QoE report provides a deeper look at a company’s financial performance to determine whether its reported earnings accurately reflect ongoing operations.
While a business valuation estimates what a company is worth, a QoE examines the reliability and sustainability of the earnings supporting that value.
Under the SBA’s updated requirements, the analysis must be performed by an independent, experienced financial professional for the lender’s benefit. A report prepared by or for the seller cannot satisfy the requirement.
The required analysis includes procedures designed to evaluate the reliability and sustainability of the business’s earnings, including:
- Financial reconciliation: Comparing financial statements, tax returns, internal records, and IRS transcripts to establish normalized earnings.
- Cash flow verification: Reconciling bank statements with reported financial activity for the trailing 12 months and previous two fiscal years, when applicable.
- Earnings adjustments: Evaluating non-recurring expenses, owner compensation, related-party transactions, and other adjustments affecting profitability.
- Revenue sustainability: Assessing customer concentration, contract continuity, and the likelihood that earnings will continue after the acquisition.
How could the new SBA requirements affect an acquisition?
The findings of a QoE report can directly influence SBA lending decisions.
Lenders must use the earnings identified through the analysis when calculating debt service coverage, which measures a business’s ability to generate enough cash flow to meet its debt obligations.
If the analysis identifies lower sustainable earnings than initially anticipated, it could affect the transaction’s debt-service coverage and, in turn, the amount or structure of SBA financing available.
For business buyers, discussing QoE requirements with lenders early can help avoid unexpected costs or closing delays. Sellers can prepare by organizing financial records and documenting unusual expenses or earnings adjustments. SBA lenders should ensure their underwriting processes account for the new requirements and incorporate QoE findings into financing decisions.
What’s next?
Buying or selling a business comes with a lot of moving pieces, and understanding the numbers is a big one. Our Quality of Earnings pros help buyers, sellers, and lenders get a clearer picture of a business’s financial performance and identify potential surprises before they become bigger issues.
Have questions about the new SBA requirements or an upcoming transaction? Let’s talk. We’re here to help you uncover the full financial picture.
Related resources
If you’re thinking about buying or selling a business, check out our transaction advisory video to see how our team can help throughout the process. Our Business Valuation Basics video breaks down what goes into determining a company’s value, while our exit planning video offers tips on preparing for a successful transition. There’s a lot to consider, and we’re here to help you make sense of it all.
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