Effective October 1, 2026, certain SBA-financed business acquisitions will require an independent Quality of Earnings analysis before a lender can close.
A Meaningful Shift in How SBA Deals Get Underwritten
SOP 50 10 8.1, effective October 1, 2026, requires lenders in qualifying 7(a) change-of-ownership transactions to obtain an independent Quality of Earnings (“QoE”) report. The QoE tests whether reported earnings are real, recurring, and sustainable and the lender must underwrite to that number.
What the New Quality of Earnings Requirement Actually Says
The requirement appears in Appendix 15 of the Standard Operating Procedure (SOP):
|
Requirement |
What the SOP Specifies |
| When it applies | Initial Acquisition and Business Expansion deals priced at $3 million or more, net of owner-occupied real estate at appraised value. |
| Who prepares it | An independent financial professional engaged by the lender. |
| What it covers | Reconciliation of internal financials, tax returns, and IRS transcripts to normalized earnings, plus a Cash Proof for the trailing twelve months and prior two fiscal years. |
| Exemptions | Owner Buyout and ESOP & Cooperative transactions. |
| How it’s used | QoE earnings drive the Debt Service Coverage determination; the report stays in the credit file. |
What Is a Quality of Earnings Report?
Businesses are valued on a multiple of EBITDA, but reported EBITDA rarely reflects what a business earns on a recurring, arm’s-length basis. A QoE bridges that gap, examining monthly detail across at least three fiscal years plus the trailing twelve months and adjusting for:
- Owner compensation: restated to market replacement cost.
- Owner-discretionary expenses: vehicles, personal travel, meals and entertainment, club dues, and payroll for family members not active in operations.
- Related-party items, most often rent, restated to market value.
- Non-recurring items such as legal settlements, gains and losses on asset sales, and one-time professional fees.
- GAAP and methodology differences, including revenue recognition and cash-to-accrual conversion.
A QoE is not an audit. An audit tests GAAP compliance and opines on annual net income; a QoE is analytical, normalizing EBITDA month by month and examining the drivers behind it.
For additional information surrounding QoE reports, please see our Middle Market Guide to Quality of Earnings HERE.
Why the SBA Is Asking for This?
The rationale is credit discipline. If asserted EBITDA is overstated, the loan is sized against cash flow that does not exist. The Cash Proof, which agrees reported revenue and expenses to actual bank activity, is among the most effective ways to confirm the financials reflect reality.
What This Means for Current & Prospective Borrowers
Understand the information needed. Monthly financial statements, trial balances, bank statements, the general ledger, payroll, and tax returns are all standard information requests needed for a QoE. It’s important to understand what type of information the underlying business will need to be able to populate.
Build the time into your schedule. A typical QoE runs ~ 45 days from engagement to final report: about a week for kickoff and the data request, three to four weeks of fieldwork and management interviews, then a draft report and a final shortly after. Lenders with delegated authority under the SBA’s Preferred Lender Program can issue a loan number before the QoE is finished, but the engagement letter must be signed first and the report completed before closing.
Expect the QoE to drive the loan amount. Lenders size the loan against the earnings the QoE supports, not the earnings in the offering materials. If those earnings don’t cover the annual debt payments, the loan is reduced and the gap has to be closed with more buyer equity, a lower price, or seller financing.
How Bonadio Can Help
Bonadio’s Transaction Advisory Services team supports lower middle-market M&A participants from evaluation through deal closing with buy-side and sell-side financial diligence and Quality of Earnings analyses. Drawing on transaction professionals, accounting and tax specialists, and business advisors, our team helps lenders, buyers, and sellers assess normalized earnings, identify transaction risks, and move through diligence while adhering to deal timelines.
The Takeaway
For SBA-financed acquisitions at or above $3 million, an independent QoE is no longer optional after October 1, 2026, and it will drive the loan amount. Clean books and supportable profitability separate deals that close on schedule from those that stall.
Connect With Us
Partner & Team Leader, Bonadio Corporate Finance | jlewis@bonadio.com | 585.249.2862
Partner, Bonadio Corporate Finance | ddinolfo@bonadio.com | 585.662.2216
Principal, Bonadio Corporate Finance | jrogers@bonadio.com | 585.203.9457
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
