When a business is bought or sold, financial performance is central to nearly every conversation. Buyers want confidence in the company they are acquiring. Lenders need to understand whether the business can support its debt. Sellers want the financial results they have worked hard to build reflected in the purchase price.
Beginning October 1, 2026, a new SBA requirement brings additional attention to those financial results. Under SBA SOP 50 10 8.1, lenders generally need to obtain an independent Quality of Earnings (QoE) report for certain SBA 7(a) change-of-ownership loans with a business purchase price of $3 million or more.
For buyers, sellers, and lenders, the change creates an opportunity to prepare earlier, ask better questions, and reduce avoidable surprises during a transaction.
Reported profit is only the starting point. Buyers and lenders need confidence that the earnings can continue after closing.
What Is a Quality of Earnings Report?
A Quality of Earnings report reviews the financial performance of a business and evaluates how dependable its earnings appear to be. The review is designed to help users understand the sources of a company’s revenue and expenses, as well as whether the available records support the reported results.
This process typically looks beyond summary financial statements. Depending on the business and the scope of the engagement, the review may consider tax returns, bank statements, general ledger data, payroll information, customer revenue, receivables, payables, debt schedules, and other supporting documentation.
A QoE can also examine proposed adjustments to earnings. In a sale process, these are often called add-backs. They may include expenses a seller believes will not continue under a new owner, such as personal expenses, certain discretionary costs, or unusual items.
Some adjustments may be appropriate. Others may require further support.
For example, an expense described as nonrecurring may appear in the company’s records year after year. Or, an owner’s compensation may be identified as an add-back even though the owner performs operational duties that a buyer will need to replace. A QoE review helps clarify which earnings adjustments are reasonable and which may overstate the company’s ongoing performance.
What the New SBA Requirement Covers
Effective October 1, 2026, the SBA’s updated guidance generally requires an independent QoE report for certain 7(a) business acquisition loans involving a business purchase price of $3 million or more.
The requirement generally applies to initial acquisitions and certain business expansion transactions. The $3 million threshold is based on the business’s purchase price before accounting for buyer equity, seller financing, or other funding sources. If owner-occupied real estate is included in the transaction, the appraised value of that real estate is excluded from the threshold calculation.
Certain ownership changes are excluded from the mandatory requirement, including owner buyouts and ESOP or cooperative transactions.
The report must be completed by an independent, experienced financial professional for the benefit of the lender. The buyer generally pays for the report. A buyer or seller may choose to commission financial diligence before lender underwriting begins, but that work does not automatically satisfy the SBA lender’s QoE requirement.
For certain SBA-backed acquisitions of $3 million or more, Quality of Earnings will be required as part of lender due diligence.
Why Earnings Quality Can Affect the Deal
A business valuation and a Quality of Earnings analysis serve different purposes.
A valuation estimates the company’s value. A QoE analysis assesses whether the earnings used to support that value are well documented and likely to be sustainable.
The distinction can have meaningful consequences.
Suppose a business is marketed based on adjusted EBITDA of $800,000. During the diligence process, a QoE review finds that $150,000 of the proposed adjustments lack support or are likely to continue after closing. The business may have normalized earnings closer to $650,000.
That change could affect the buyer’s view of the purchase price, the lender’s assessment of available financing, and the overall transaction structure. Even if the valuation multiple remains the same, lower sustainable earnings can reduce the value supported by the financial results.
For SBA-financed transactions, the analysis can also affect debt-service coverage. Lenders need to assess whether the business has sufficient cash flow to make its loan payments. If the QoE review identifies unsupported adjustments or lower recurring earnings, the deal may require additional buyer equity, a revised purchase price, revised terms, or another solution.
A change in verified earnings can reshape the purchase price, financing, and structure of a transaction.
Following the Financial Trail
Financial statements are important, but they are only one part of the picture. A Quality of Earnings review often involves comparing reported results with other financial evidence.
For example, a company’s income statement may show a certain amount of revenue. The QoE process may compare that figure with bank deposits, merchant processor reports, tax returns, billing records, or other documentation. Differences are not necessarily a sign of a problem. Timing differences, accounting methods, transfers, and financing activity can all create reasonable explanations.
However, differences should be understood and documented.
The same approach applies to expenses. A review may highlight personal items paid through the business, payments to related parties, unusual accounting entries, shifting expense classifications, or operating costs that may continue after a sale. The objective is to develop a clear, evidence-based view of the company’s financial performance.
Why Sellers Should Prepare Early
Although the new requirement is focused on lender underwriting, sellers have a strong interest in being prepared before a business enters the market.
A well-prepared seller can anticipate the types of questions a buyer, lender, or QoE provider is likely to ask. Financial information should be organized, readily available, and consistent across the company’s internal statements, tax filings, cash activity, and supporting documentation.
Preparation may include documenting add-backs, reviewing related-party transactions, reconciling financial statements to tax returns, addressing personal expenses paid by the business, and ensuring that balance-sheet accounts are adequately supported.
Early preparation can help business owners respond more efficiently to diligence requests and reduce the likelihood of late-stage issues that disrupt a transaction.
Buyers also benefit from engaging early. Even though a buyer-commissioned analysis will not replace the lender-required QoE report, it can provide valuable insight before the buyer commits substantial time, capital, and resources to a deal.
Financial readiness should begin before a business is listed for sale or a letter of intent is signed.
Preparing for a More Rigorous Transaction Environment
The SBA’s new QoE requirement reflects a broader trend in privately held business transactions. Buyers and lenders are seeking stronger evidence that a company’s financial performance can support both the value assigned to the business and the debt used to acquire it.
RKL’s Consulting Team has extensive experience with Quality of Earnings reports, supporting buyers, sellers, and lenders through financial due diligence and transaction readiness planning. Our professionals help clients understand the financial details of a transaction, identify areas that may require attention, and prepare for questions that may arise during the deal process.
Contact RKL’s Consulting Team to discuss Quality of Earnings, acquisition diligence, or preparing your business for a future sale.
