The New SBA Quality of Earnings Requirement: What Buyers, Lenders, and Brokers Need to Know
For the first time, the SBA is requiring quality of earnings (QoE) reports on certain business acquisitions. Under the updated SBA Standard Operating Procedure (SOP 50 10 8.1), which applies to applications SBA receives on or after October 1, 2026, a QoE is now part of the process for many larger SBA 7(a) deals.
This post covers when a QoE is required, what the report must include, how the change affects who engages the QoE provider, and what it means for you as a buyer, lender, seller, or broker.
When Is a Quality of Earnings Report Required?
Under the new SOP, a quality of earnings report is required on SBA deals with a business purchase price of $3 million or more. That covers both:
- Initial acquisitions, and
- Business expansion loans
Owner buyouts and ESOP or cooperative transactions are exempt, because the existing owners stay involved and already know the business. A QoE also isn’t required when the deal is the acquisition of an owner-occupied special purpose property.
The $3 Million Threshold Is Based on Purchase Price, Not Loan Size
This is the detail people miss. The threshold is tied to the purchase price, not the SBA loan amount. The SOP says it’s determined before buyer equity, seller debt, or any other financing is applied.
Example: You buy a business with $2 million of SBA debt, $1 million of seller financing, and $500,000 of your own equity. Your SBA loan is under $3 million, but the purchase price is $3.5 million, so the deal still requires a QoE.
Owner-Occupied Real Estate Is Excluded
Owner-occupied commercial real estate doesn’t count toward the business purchase price for this test. The lender takes the appraised value of that real estate out of the price in the purchase agreement. If you’re buying a business for $1 million and there’s $2 million of owner-occupied real estate on top of it, no QoE is required, because the purchase price of the business itself is under $3 million.
What Must Be Included in an SBA Quality of Earnings Report
The new SOP spells out what the QoE has to cover.
1. A Cash Proof
A cash proof rebuilds cash receipts and disbursements by reconciling the bank statements to the income statement and the tax return for each period. It has to cover the trailing 12 months and the last two fiscal years (or every year the business has operated, if it’s younger than two years). It’s required on every SBA QoE, and frankly, it should have been part of any quality of earnings report all along.
2. A Reconciliation to IRS Transcripts and the Books
The report must reconcile the accountant-prepared financial statements, tax returns, internal financial statements and IRS transcript data into one normalized, adjusted earnings number that reflects recurring, arm’s-length operations.
3. Every Adjustment Identified and Documented
Every add-back and adjustment to the seller’s reported earnings has to be identified and documented, including adjustments for:
- Non-recurring revenue or expenses
- Owner compensation that’s above or below market
- Related-party transactions
- Deferred maintenance
- Differences between cash and accrual accounting
4. An Assessment of Earnings Quality
This is where the “quality” in quality of earnings comes in. The provider must assess how reliable and sustainable the revenue base is, including customer concentration, contract continuity, and how likely it is that revenue and margins hold up after the sale.
How Lenders Use the QoE
The lender has to use the earnings from the QoE in its debt service coverage (DSC) calculation and keep the report in the credit file. If that DSC doesn’t support the business valuation and the proposed debt, the loan gets smaller, and more equity has to fill the gap.
How the Engagement Works: The QoE Is for the Lender
This is the biggest practical change. Historically, on SBA-backed deals, the QoE provider’s engagement was with the buyer. Buyers shopped for their own provider, built a personal relationship, and leaned on that provider as an advisor.
Under the new SOP, the QoE must be done for the benefit of the lender, and it can’t be prepared by or for the seller. When the video was recorded, it looked like a buyer’s own QoE wouldn’t count at all. The SBA’s September 25, 2026 technical update softened that: if you commissioned your own QoE before going to the lender, the lender can have it reviewed by one of its approved vendors and include that review in the loan file. The SBA notice also allows a report already prepared for the buyer to be used with a reliance letter or a secondary review by a different firm.
That still changes things for buyers. Depending on how your lender handles it, you may not get the same access to the QoE provider you would have had before. Open questions remain:
- Will buyers commission their own QoE and have the lender’s vendor review it, or let the lender order one?
- Will buyers keep their own accountant on the deal team under a separate engagement?
How this plays out in practice will become clearer in the months after October 1.
Who Is Allowed to Perform a QoE?
The new SOP doesn’t clearly define who can perform a quality of earnings report. A QoE is a consulting engagement, so technically anyone has been able to do one, though most buyers hire CPA firms because they’re best qualified. The SOP calls for an “independent, experienced financial professional” (its glossary says “independent qualified financial professional”), which is vague and doesn’t specifically require a CPA. What it does say clearly is that the report can’t be prepared by or for the seller.
Ideally, future guidance will spell out who can and can’t perform QoE reports, and will also address AI-generated quality of earnings reports. Some bad actors are putting out reports that don’t meet the standard a business acquisition deserves.
What the New SBA QoE Rule Means for You
If You’re an SBA Lender
You’ll need to decide which QoE providers you want to work with, how you’ll engage them, and how your vendors will review QoEs that buyers bring to you. When the rule was announced, many of the top SBA lenders said they didn’t yet know exactly how the process would work. Clear processes matter so buyers don’t face delays. Under PLP authority, the QoE can be finished after the SBA loan number is issued, as long as it was formally engaged by then.
If You’re a Buyer on a Live Deal
Timing is based on when SBA receives the application. Applications submitted through September 30, 2026 stay under the old SOP (50 10 8). Applications SBA receives on or after October 1, 2026 fall under the new rules, including the QoE requirement.
If You’re a Buyer Starting a New Search
If your deal will close under the new rules, think through:
- Do you still want an accountant on your side of the table, and should that accountant’s QoE be the one the lender’s vendor reviews?
- What will that engagement look like?
- Will you have access to the lender’s QoE provider if the lender orders its own? That’s uncertain, since the report has to be for the lender’s benefit.
If You’re a Seller or Broker
If you’re bringing a deal to market with a purchase price of $3 million or more, strongly consider a sell-side quality of earnings report before you go to market. Just know it won’t satisfy the SBA requirement: the SOP says the lender’s QoE can’t be prepared by or for the seller. What a sell-side QoE does is get you ahead of the issues the buyer’s or lender’s QoE will find. That improves your certainty of close and lowers the chance the deal dies in the diligence process the SBA now requires.
Frequently Asked Questions
Does the SBA require a quality of earnings report?
Yes, for SBA 7(a) initial acquisitions and business expansion loans where the business purchase price is $3 million or more, for applications SBA receives on or after October 1, 2026. Owner buyouts and ESOP or cooperative transactions are exempt.
Is the $3 million threshold based on the loan amount?
No. It’s based on the business purchase price, before any SBA debt, seller financing, or buyer equity. Owner-occupied commercial real estate is excluded at its appraised value.
What does an SBA quality of earnings report have to include?
A cash proof covering the trailing 12 months and the last two fiscal years, a reconciliation of the financial statements, tax returns and IRS transcripts, documentation of every add-back and adjustment, and an assessment of how reliable and sustainable the revenue and earnings are.
Who hires the QoE provider on an SBA deal?
The QoE must be done for the lender’s benefit and can’t be prepared by or for the seller. A QoE the buyer commissioned can be used if one of the lender’s approved vendors reviews it, or with a reliance letter or a secondary review by a different firm.
Should sellers get a sell-side QoE?
For deals of $3 million or more, a sell-side QoE can help sellers and brokers spot and fix issues before the lender’s QoE finds them, which improves the odds of closing. It doesn’t replace the QoE the SBA requires.
Stay Ahead of SBA Changes
This SOP update changes how deals get done, not just how quality of earnings reports get done. To stay current on how these changes affect you as a buyer, lender, or broker, follow Midwest CPA. If you have a deal in progress, let’s talk.
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Disclaimer
The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting, or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. SBA rules change; confirm current requirements with your lender.