Quality of Earnings Requirements for SBA Loans
What Business Buyers and Lenders Need to Know About New SBA Quality of Earnings Requirements
The Small Business Administration (SBA) recently issued revised lending guidance under SOP 50 10 8.1, effective October 1, 2026. Among the most significant changes for business acquisition financing is a new Quality of Earnings (QoE) requirement for certain change-of-ownership transactions. The guidance establishes specific circumstances in which lenders must obtain an independent QoE report as part of the underwriting process.
While many lenders have historically required financial due diligence on larger transactions as part of their internal credit policies, the revised SBA rules introduce a formal federal requirement for qualifying transactions. Understanding these requirements early can help buyers, lenders, and advisors avoid financing delays and navigate the acquisition process more efficiently.
Key Takeaways
- Certain SBA-financed change-of-ownership transactions may require a lender-obtained Quality of Earnings report when the business purchase price is $3 million or more, excluding applicable real estate.
- The report must be performed by an independent financial professional and obtained for the benefit of the lender. Seller-provided reports do not satisfy the requirement.
- The QoE findings directly impact the earnings figure used in underwriting and debt service coverage calculations.
- The revised SBA guidance becomes effective October 1, 2026.
What Is a Quality of Earnings Report?
A Quality of Earnings report is a financial due diligence analysis designed to evaluate whether a business’s reported earnings are sustainable, supportable, and representative of ongoing operations. Unlike a valuation report, which estimates business value, a QoE focuses on understanding the underlying earnings and cash flow that support a transaction.
A QoE review typically examines historical financial performance, evaluates adjustments to earnings, identifies unusual or nonrecurring items, and assesses factors that may affect future profitability. These procedures help lenders and buyers gain greater confidence in the financial information used to support financing decisions.
When Is a Quality of Earnings Report Required?
Under SBA SOP 50 10 8.1, lenders are required to obtain a Quality of Earnings report for certain change-of-ownership transactions, including Initial Acquisition and Business Expansion transactions, when the business purchase price is $3 million or greater, excluding applicable owner-occupied real estate.
Many lenders may continue to require QoE procedures for smaller transactions based on their own underwriting standards and credit policies. However, the SBA requirement creates a uniform minimum due diligence standard for qualifying transactions covered by the revised guidance.
Who Must Obtain the QoE Report?
The revised guidance requires that the Quality of Earnings report be obtained for the lender’s benefit and completed by an independent financial professional. A report prepared by or for the borrower, seller, or business broker does not satisfy the SBA requirement.
This independence requirement is intended to provide lenders with an objective assessment of the business’s financial performance and reduce the risk of relying on unsupported earnings adjustments during the underwriting process.
“Under revised SBA SOP 50 10 8.1 guidance, qualifying acquisitions of $3M or more face formal, mandatory Quality of Earnings requirements to validate true cash flow before closing.”
How Does the QoE Impact Loan Underwriting?
The findings of the Quality of Earnings review play a significant role in the lender’s analysis of a transaction. The report helps establish a normalized earnings figure that lenders use when evaluating cash flow, debt service coverage, and overall repayment capacity.
If the QoE identifies unsupported add-backs, unusual expenses, or other adjustments that reduce normalized earnings, the business may generate less cash flow than originally anticipated. In some cases, these findings may affect loan structure, financing amounts, required equity contributions, or other underwriting considerations.
For that reason, buyers should avoid waiting until late in the transaction process to address QoE requirements or potential earnings adjustments.
Practical Considerations for Buyers and Lenders
As transactions subject to the new requirements move through the financing process, early planning will become increasingly important.
| Business Buyers Should: | Lenders Should: |
|---|---|
| Discuss QoE requirements with their lender as early as possible. | Confirm whether a proposed transaction falls within the SBA's QoE requirements. |
| Understand whether the lender maintains a list of preferred providers. | Engage qualified independent professionals early in the underwriting process. |
| Incorporate the timing and cost of the QoE into transaction planning. | Ensure the report is obtained for the lender's benefit and meets applicable SBA standards. |
| Be prepared to provide detailed financial records and supporting documentation. | Evaluate the impact of QoE findings before finalizing loan terms. |
Preparing for the October 1, 2026 Effective Date
The revised SBA guidance reflects a broader emphasis on validating earnings and cash flow in change-of-ownership transactions. While Quality of Earnings analyses have long been considered a best practice in larger acquisitions, qualifying SBA-financed transactions will now face more formal due diligence requirements beginning October 1, 2026.
Buyers, lenders, and advisors who understand these requirements early can better position themselves for a smoother underwriting process and a more informed acquisition decision.
Disclaimer: This article is intended for general informational purposes only and should not be considered legal, lending, tax, accounting, or financial advice. SBA lending requirements may change, and individual circumstances vary. Consult with qualified advisors regarding your specific transaction and financing needs.
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Mike Kiene brings over two decades of experience to middle-market clients, specializing in quality of earnings, risk management, and due diligence across diverse industries. He works within a wide range of industries, including construction, manufacturing and distribution, and dealerships.