SBA's New Quality of Earnings Requirement | Meaden & Moore

New QoE requirements take effect for certain $3 million-plus SBA 7(a) acquisitions beginning October 1, 2026

KEY TAKEAWAY: Beginning October 1, 2026, SBA lenders must obtain both an independent business valuation and an independent Quality of Earnings analysis for qualifying Initial Acquisition and Business Expansion transactions with a business purchase price of $3 million or more.

Effective October 1, 2026, SBA SOP 50 10 8.1 introduces a new independent Quality of Earnings (QoE) requirement for certain SBA 7(a)-financed acquisitions. The new guidance applies to qualifying applications issued an SBA loan number on or after October 1, 2026. The lender must obtain the QoE and use the earnings supported by the analysis when determining debt service coverage.

This change introduces a new level of financial diligence for SBA-financed acquisitions and may impact transaction timing, financing structure, and purchase price negotiations.

What Is a Quality of Earnings Analysis?

A Quality of Earnings analysis is a financial due diligence report that examines the reliability, sustainability, and accuracy of a business's historical earnings.

A typical QoE evaluates:

• EBITDA normalization adjustments
• Nonrecurring revenues and expenses
• Owner compensation adjustments
• Related-party transactions
• Revenue quality and sustainability
• Cash flow generation support

The goal is to determine the earnings level that can reasonably be relied upon for financing and underwriting purposes.

Who Does the New Requirement Apply To?

Based on currently published guidance, the requirement generally applies to SBA-financed:

• Initial business acquisitions
• Business expansion acquisitions
• Transactions with a business purchase price of $3 million or greater

The guidance indicates that both first-time buyers and existing businesses pursuing growth through acquisition may be subject to the requirement when SBA financing is used.

Certain transactions are specifically exempt, including:

• Owner buyouts
• Employee Stock Ownership Plan transactions
• Cooperative transactions

These exemptions generally apply where ownership continuity and operational knowledge remain in place following the transaction.

Key Details to Understand

The $3 Million Threshold Is Based on Business Purchase Price

The threshold is measured before applying buyer equity, seller financing, or other funding sources. Adding a seller note or increasing buyer equity generally does not eliminate the requirement.

Owner-Occupied Real Estate Is Generally Excluded

If owner-occupied real estate is included in the transaction, its appraised value is generally excluded when determining whether the $3 million threshold has been met.

The Lender Must Obtain the QoE Analysis

The QoE must be performed by an independent, experienced financial professional and conducted for the benefit of the lender. The analysis may not be prepared by or for the borrower or seller. A buyer-side or seller-side QoE may still provide valuable transaction diligence, but a QoE prepared by or for the borrower or seller does not satisfy the SBA requirement.

The QoE Does Not Replace the Valuation

The SBA's new requirement does not eliminate the need for a business valuation. Rather, qualifying transactions require both an independent valuation and an independent QoE. A valuation helps determine the fair market value of a business, while a QoE evaluates the quality and sustainability of the earnings supporting that value and the related financing structure.

Required Elements of an SBA-Compliant QoE

The SBA-required analysis goes beyond a high-level review of reported earnings and includes financial reconciliation, documented adjustments, revenue sustainability considerations, and a Cash Proof. Key areas include:

• Revenue quality and sustainability. Assess factors that may impact the quality and sustainability of revenue, including customer concentration, contract continuity, and other key drivers of recurring business activity.
  
  
• Documented adjustments. Identify and support all adjustments made to reported earnings, including nonrecurring revenues or expenses, owner compensation adjustments, related-party transactions, and differences between cash-basis and accrual-basis accounting.
  
  
• Cash Proof. Reconcile bank activity to the company's financial statements and tax returns to validate reported earnings. The Cash Proof must cover the trailing 12 months and the two most recent fiscal years and is intended to identify potential income discrepancies and undisclosed expenses.
  
  
• Financial reconciliation. Reconcile accountant-prepared financial statements, tax returns, internal financial statements, and IRS transcript data to produce a normalized, adjusted earnings figure that reflects recurring, arm's-length operations.

The Findings Can Impact Financing

The lender must use the earnings determined by the QoE when calculating debt service coverage and retain the QoE report in the credit file. If the resulting earnings do not provide sufficient debt service coverage for the proposed financing structure, the loan amount may need to be reduced, additional buyer equity may be required, or the transaction may need to be restructured. The findings may also affect purchase price negotiations and transaction timing.

For businesses with aggressive add-backs or poorly supported adjustments, the QoE may significantly impact financing assumptions. Companies with clean financial records and supportable EBITDA adjustments are likely to experience a smoother underwriting process.

Plan for the Required Data and Timing

The required reconciliations and Cash Proof can be data-intensive. Buyers, sellers, and lenders should address the QoE early and organize financial statements, tax returns, IRS transcript data, general ledger detail, and bank statements for the periods under review.

What This Means for Buyers and Sellers

The new requirement reinforces the growing importance of financial diligence within lower middle-market M&A transactions.

For buyers, the QoE provides independent validation of the earnings supporting the investment thesis, purchase price, and financing structure.

For sellers, preparation is increasingly important. Businesses with organized financial records, supportable add-backs, and a clear understanding of normalized earnings are likely to be better positioned throughout the sale process.

Buyers, sellers, and lenders should view the QoE and valuation as complementary analyses. One helps determine what a business is worth, while the other helps determine whether the earnings supporting that value are sustainable and financeable.

How Meaden & Moore Can Help

Meaden & Moore offers an integrated transaction advisory and valuation platform to support buyers, sellers, and lenders throughout the acquisition process.

•    Quality of Earnings analyses
•    Buy-side and sell-side readiness and financial diligence
•    Working capital analyses
•    Debt and debt-like assessments
•    Business valuations
•    SBA lending support

Our team helps clients understand not only what a business is worth, but also the quality and sustainability of the earnings supporting that value.

Questions? Contact Joe Salata, Mark Kasinec, Lloyd Bell, or any member of our Transaction Advisory Services and Valuation Services teams.