Starting October 1, 2026, an SBA quality of earnings report becomes mandatory on larger acquisition loans: for any Initial Acquisition or Business Expansion financed with an SBA 7(a) acquisition loan at a purchase price of $3 million or more, the SBA will require an independent Quality of Earnings report prepared for the lender, in addition to the business valuation that has long been required. The change takes effect under Standard Operating Procedure 50 10 8.1. A Quality of Earnings review has been optional on these deals; under the new rule it will not be.
This is one of the most consequential underwriting changes the 7(a) program has seen in years, and it changes how buyers, sellers, and lenders need to prepare for a deal.
This article explains what an SBA Quality of Earnings review is, when the new requirement applies, what the report must test, and how its findings can raise or lower the earnings a lender is allowed to underwrite. If you are buying a business with a 7(a) loan, selling to a buyer who will use one, or lending against one, understanding this requirement early is the difference between a clean close and a deal that has to be restructured at the last minute.
What a Quality of Earnings Review Is, and How It Differs From a Valuation
A Quality of Earnings review, often shortened to QoE, is an independent analysis of whether a company’s reported earnings are accurate, supported by records, and sustainable under a new owner. It does not simply accept the profit shown on a tax return or an income statement. It rebuilds that number from source documents to answer a single question: how much of this profit is real, recurring, and transferable?
That is a different question from the one a business valuation answers. A valuation concludes what the business is worth, its fair market value. A Quality of Earnings review tests whether the earnings feeding that value are genuine and repeatable. The two work together, but one does not replace the other. Under the new SBA rule, a qualifying acquisition needs both an independent valuation and an independent QoE, because they answer different questions and protect the loan in different ways.
The distinction matters because most private-company acquisitions are priced on a multiple of earnings, usually adjusted EBITDA or seller’s discretionary earnings. If the earnings figure is overstated by unsupported add-backs or one-time items, both the price and the loan sized against it are overstated too. The QoE is the SBA’s mechanism for making sure the number the lender underwrites is one the business can actually produce again next year. For sellers who want to get ahead of this scrutiny, our guide on preparing a quality of earnings review before you sell explains how to do the work proactively.
When the New SBA QoE Requirement Applies
The requirement is targeted, not universal. It applies to two of the change-of-ownership categories under SOP 50 10 8.1, Initial Acquisition and Business Expansion, and only when the purchase price is $3 million or more. Owner Buyout, ESOP, and cooperative transactions are exempt from the QoE mandate even at the same dollar level. Advisory firms tracking the change, including CLA’s analysis of the new requirement, have flagged it as a meaningful shift for anyone underwriting or selling into a 7(a) acquisition.
The $3 million threshold is measured on the purchase price before any buyer equity injection, seller financing, or other sources of funds are applied. In other words, it is the total price of the business, not the size of the loan. When the transaction includes owner-occupied commercial real estate, the value of that real estate is excluded from the calculation, because it is appraised separately.
In short, the SBA QoE mandate is triggered when all of these are true:
- The transaction is an Initial Acquisition or a Business Expansion under SOP 50 10 8.1.
- The purchase price is $3 million or more, measured before buyer equity, seller financing, or other sources.
- Any owner-occupied commercial real estate is set aside, because its value is excluded from the price used for the threshold.
Owner Buyout, ESOP, and cooperative transactions fall outside the mandate, even at or above the same dollar level.
A few practical points follow from this. A deal priced at $2.9 million does not trigger the QoE requirement, but a deal priced just above $3 million does, so buyers and sellers near the line should confirm where they fall early. The requirement is in addition to, not instead of, the business valuation rules. Under SOP 50 10 8.1, an independent valuation from a qualified source is required on every change-of-ownership acquisition, which tightens the prior rule that had let a lender perform its own valuation in-house when the financed goodwill or intangible portion was $250,000 or less. A close or familial relationship between buyer and seller remains an independent reason a qualified-source valuation is required. A larger acquisition can therefore need both an independent valuation and an independent QoE.
It is also worth noting who the report is for. The SBA requires the QoE to be prepared by an independent, experienced financial professional engaged for the lender’s benefit. It is not a report the borrower or seller commissions for themselves and hands over. That independence is central to the point of the requirement, and it shapes how the engagement is structured. Our transaction advisory team is engaged directly by lenders for exactly this purpose.
What the SBA QoE Report Must Test
An SBA Quality of Earnings report is more demanding than a general-purpose diligence memo. The centerpiece is what the SBA calls a Cash Proof, a reconciliation that ties the company’s bank statements to its income statements and its tax returns across the trailing twelve months and the last two fiscal years. The Cash Proof exists to catch the most basic and most damaging problem in a small-business acquisition: revenue or profit that appears on internal statements but cannot be traced to money that actually moved.
Beyond the Cash Proof, the report documents and tests the earnings adjustments, the add-backs, that turn reported profit into the adjusted earnings a buyer pays for. Common add-backs the analysis scrutinizes include:
- Above-market owner compensation.
- One-time or non-recurring expenses.
- Discretionary or personal spending run through the business.
Each one has to be justified in writing and supported by records. An add-back that cannot be traced to a document is an add-back the analysis removes.
The report also examines the durability of the revenue itself. Customer concentration is a frequent focus, because a business that earns most of its profit from one or two customers carries a risk that a diversified business does not. Revenue trends, contract renewals, and the sustainability of recent growth all factor into whether the earnings a buyer is counting on will still be there after the sale. These are the same questions a disciplined buyer would ask in any deal, which is why sell-side preparation pays off; see our discussion of controlling the narrative through sell-side due diligence.
How the QoE Moves the Loan: Earnings, Add-Backs, and DSCR
The reason the QoE has teeth is that its conclusions feed directly into the numbers the lender is allowed to use. Under the new SOP, the lender must underwrite repayment ability using the earnings the QoE supports, not the earnings the seller claims. If the QoE strips out an add-back the seller wanted credit for, the adjusted earnings fall, and so does the cash flow available to service the loan.
That connection runs straight into the debt service coverage ratio, the measure of whether the business generates enough cash to cover its loan payments. A ratio of 1.15 has long been the widely applied baseline for 7(a) repayment ability. SOP 50 10 8.1 sets category-specific minimums directly: 1.15 for a Business Expansion and 1.25 for an Initial Acquisition, an Owner Buyout, or an ESOP or cooperative transaction. Just as important, the new rule does not allow post-closing projections to satisfy the floor, so the coverage has to be demonstrated on historical or adjusted results rather than on a forecast.
Consider a simplified, illustrative example. A buyer agrees to purchase a business at a price built on $1,000,000 of adjusted earnings, including a $150,000 add-back for the seller’s compensation. If the seller will stay with the company and continue drawing that salary, that compensation is a recurring cost the buyer must keep paying, so a rigorous QoE will generally not let it be added back, and adjusted earnings drop to $850,000. At an acquisition DSCR floor of 1.25, that reduction can be the difference between a loan that qualifies and one that does not, which may force a lower price, a larger equity injection, or a restructured deal. The general principle is that an add-back only holds if the cost will not recur under new ownership, so buyers and sellers should confirm how a specific seller-transition arrangement will be treated before pricing a deal around it.
The lesson is that add-backs are not free. Each one has to be documented, defensible, and consistent with how the business will actually run under new ownership. A QoE done early, before the deal is priced and the loan is sized, lets everyone build the transaction on numbers that will hold up rather than discovering during underwriting that the earnings were softer than the marketing materials suggested.
Frequently Asked Questions
Does every SBA 7(a) acquisition need a Quality of Earnings report under SOP 50 10 8.1?
No. Under SOP 50 10 8.1, effective October 1, 2026, the independent QoE requirement applies to Initial Acquisition and Business Expansion transactions with a purchase price of $3 million or more. Owner Buyout, ESOP, and cooperative transactions are exempt, and deals priced below $3 million are not subject to the mandate, although a lender may still request a QoE on any deal.
Is a Quality of Earnings review the same as an SBA business valuation?
No. A business valuation concludes what the company is worth, its fair market value. A Quality of Earnings review tests whether the reported earnings are accurate, supported, and sustainable. A qualifying acquisition can need both, because they answer different questions, and the QoE does not replace the separately required valuation.
Who is allowed to prepare the SBA Quality of Earnings report?
The SBA requires an independent, experienced financial professional engaged for the lender’s benefit. The report is not prepared by or for the borrower or the seller. In practice this means a CPA or transaction advisory firm with earnings-diligence experience, retained by the lender rather than the deal parties.
How does the QoE affect how much a business can borrow?
The lender must underwrite repayment ability using the earnings the QoE supports. If the QoE removes unsupported add-backs, adjusted earnings and the debt service coverage ratio both fall, which can reduce the loan the business qualifies for or require a higher equity injection. That is why the QoE can change price and deal structure, not just paperwork.
What is the Cash Proof in an SBA QoE?
The Cash Proof is a reconciliation that ties the company’s bank statements to its income statements and tax returns over the trailing twelve months and the last two fiscal years. It confirms that reported revenue and profit correspond to money that actually moved, and it is a core component of the SBA-required QoE.
When should a buyer or seller start the QoE process?
As early as possible, ideally before the purchase price is set and the loan is sized. Identifying which add-backs will and will not survive lets both sides build the deal on defensible numbers, avoid a last-minute restructuring during underwriting, and keep the closing timeline on track.
