Effective October 1, 2026, the SBA requires 7(a) lenders to obtain an independent quality of earnings (QoE) report for Initial Acquisition and Business Expansion change-of-ownership loans where the business purchase price is $3 million or more, excluding owner-occupied real estate and measured before any equity injection or seller financing. The requirement comes from SOP 50 10 8.1, which governs the SBA's loan origination policies and procedures.
The report must be performed by an independent financial professional and commissioned by and for the benefit of the lender. A report prepared by or for the buyer or seller does not, on its own, satisfy the requirement. Owner buyouts, ESOP conversions, and cooperative conversions are exempt.
The QoE must reconcile the business's accountant-prepared financial statements, tax returns, and internal financial statements to produce a normalized, adjusted EBITDA figure. It must include a cash proof reconciling bank statement activity to the income statement and tax returns for the trailing twelve months and each of the last two fiscal years, document add-backs and adjustments, and assess the quality and sustainability of the revenue base, including customer concentration risk, backlog and contract continuity, and the durability of existing revenue and margins.
Lenders must use the QoE's earnings figure when calculating debt service coverage. If the independent analysis does not support a specific adjustment or add-back, that amount is excluded from the earnings the lender may rely on to size the loan. A deal priced on aggressive add-backs that the QoE disallows may result in a smaller-than-expected loan, a larger equity injection from the buyer, a renegotiated purchase price, or a deal that no longer qualifies for SBA financing on its current terms.
The new requirement raises the cost of late-stage revisions to a seller's EBITDA. Although a seller-commissioned QoE will not satisfy the SBA requirement, a business that completes one before going to market can identify and address weak add-backs in advance, reducing the risk of late-stage surprises and supporting a smoother, faster financing process.
