Why it matters

For years, Quality of Earnings reports have been considered a best practice in business acquisitions. Beginning October 1, 2026, they will become a requirement for many SBA-financed transactions.

Under SBA SOP 50 10 8.1, lenders must obtain a QoE report for Initial Acquisition and Business Expansion transactions when the business purchase price is $3 million or greater. The requirement is in addition to the SBA's business valuation requirements and is intended to provide greater confidence that reported earnings and cash flow can support the acquisition debt.

What is a Quality of Earnings (QoE)?

A Quality of Earnings report evaluates the sustainability and reliability of a company's earnings and cash flow. The analysis typically focuses on:

• Revenue quality
• Earnings adjustments and add-backs
• Owner compensation
• Working capital requirements
• Customer concentration
• Cash flow trends and a cash proof

The objective is to determine whether reported earnings accurately reflect the company's ongoing earning power. 

Check out our blog, What Is a Quality of Earnings (QoE) and Why Does It Matter When Selling a Business? for all the details.

How does the new requirement work?

The $3 million threshold is based on the business purchase price and is calculated before considering buyer equity, seller financing, or other funding sources. When owner-occupied real estate is included in the transaction, its appraised value is excluded from the calculation.

Buyers should also understand that the QoE is now part of the lender's underwriting process, not just a buyer diligence exercise. As a result, lenders will typically select or approve the firm performing the work and rely on that report in their credit decision. Buyers should engage with their lender early to understand provider requirements, timing, and expectations.

Most importantly, the SBA requires lenders to use the QoE findings in their debt service coverage analysis. If the QoE identifies issues that negatively affect sustainable earnings or cash flow, the lender may need to reduce the loan amount or require additional buyer equity.

What should buyers be thinking about?

• Confirm whether the requirement applies. Determine whether the transaction type and business purchase price trigger the QoE requirement.
• Talk to your lender early. Ask who will perform the work, whether the lender maintains an approved provider list, and how the process could affect timing.
• Build the cost into your deal budget. Plan for the QoE alongside legal fees, lender costs, valuation fees, and other diligence expenses.
• Dig into the numbers early. Evaluate earnings, cash flow, working capital, add-backs, and potential red flags before formal diligence begins.
• Be prepared for the deal terms to change. The QoE findings may affect the loan amount, buyer equity contribution, purchase price, or overall deal structure.

Final thoughts

The new SBA requirement raises the diligence standard for larger acquisition transactions. While it adds another step to the process, it should provide buyers and lenders with greater confidence in the earnings supporting the investment.

For buyers, one of the biggest practical changes is that the QoE is no longer simply a buyer diligence tool. It becomes a formal part of the lender's underwriting process. Engaging with lenders early, understanding provider requirements, and allowing sufficient time for the QoE process will help avoid surprises and keep transactions moving toward a successful close.