SBA Quality of Earnings Report Now Mandatory for Larger Change-of-Ownership Loans

For years, lenders and borrowers treated a quality of earnings (financial due diligence) (QoE) report as optional on Small Business Administration (SBA) 7(a) change-of-ownership loans. Useful, but not required. As of October 1, 2026, that has changed for a meaningful share of these transactions.

Key Takeaways

• Starting October 1, 2026, the SBA will require an independent quality of earnings report on 7(a) change-of-ownership loans for initial acquisitions and business expansions priced at $3 million in enterprise value or more.
• Owner buyouts and ESOPs are exempt because the existing owner retains operational knowledge after closing.
• An independent financial professional working for the lender should prepare the report, reconcile accountant-prepared statements, tax returns, and IRS transcript data into a consolidated earnings report.
• Lenders must use the report’s earning figure in the debt service coverage calculation; minimum DSC is 1.25:1 for initial acquisitions and owner buyouts, and 1.15:1 for business expansions.

Why This Gap Existed

Change-of-ownership lending has grown into one of the largest categories of 7(a) volume. Still, the underwriting file has had a persistent blind spot: nothing in it independently tests the earnings figure on which every other number in the deal depends. The appraiser worked from the financial information they were given, which was the assignment, not an oversight. Tax transcripts confirmed what had been filed, not whether the underlying numbers were repeatable or accurate to begin with.

Issued by the SAB, the Standard Operating Procedure (SOP) 50 10 8.1 closes that gap by setting a standard for the diligence work itself, not just on who signs the report.

What Does the New Rule Require?

The updated SOP organizes change-of-ownership transactions into four categories: initial acquisition, expansion, owner buyout, and employee stock ownership plan (ESOP) or cooperative conversion. Financial due diligence obligations scale with the entity’s purchase price, defined as the amount in the purchase and sale agreement, less any owner-occupied real estate carried at appraised value.

Credit and Business Development Teams: Understanding the New Requirements

There are several provisions worth flagging for credit and business development teams. To fully understand the provisions, let’s break down what the new requirement actually means.

When Is a Quality of Earnings Report Required?

A quality of earnings (financial due diligence) report is required for initial acquisition and business expansion transactions with a purchase price of $3 million or more. Owner buyouts and ESOP or cooperative deals are exempt, since the existing owner retains operational knowledge after closing.

Who Performs the Report?

The report must be prepared by an independent financial professional that has been engaged by and acting on behalf of the lender. It cannot be prepared by or for the borrower or seller, and a seller-side report supplied through a broker does not satisfy the requirement.

Does the Report Replace the Valuation?

No, it supplements the valuation. The two reports are meant to work together, not stand in for one another.

What Should the Report Include?

The content is prescribed. The report must reconcile accountant-prepared statements, tax returns, internal financials, and General Ledger financial data IRS transcript data into a single normalized earnings figure. Every add-back, including non-recurring items, above- or below-market owner compensation, related-party transactions, deferred maintenance, and cash-versus-accrual differences, must be documented and evaluated against historical reported Net Income to arrive at a pro forma, adjusted EBITDA number. The report must also assess revenue quality, including customer concentration, contract continuity, and the likelihood that margins hold after the sale.

Is Cash Proof Mandatory?

Yes. Reported cash receipts and disbursements must reconcile bank statement data on a trailing 12-month basis and across the two most recent fiscal years.

Does the QoE Report Drive the Credit Decision?

Yes. Lenders must use the pro forma, adjusted earnings figure from the report in the debt service coverage (DSC) calculation and retain the report in the credit file. If the resulting DSC does not support the proposed structure, the loan amount must be reduced, or the borrower must cover the gap with additional equity. Minimum DSC is 1.25 to 1 for initial acquisitions and owner buyouts, and 1.15 to 1 for business expansions.

What Is the Timing Under the Preferred Lender Program?

The valuation and the quality of earnings (financial due diligence) engagement can be completed after the SBA loan number is issued. Still, both must be formally engaged, with a vendor retained and an engagement letter signed, at the time the number is issued. The credit memo must then be updated once the findings come in.

How Is This Cost Treated?

Diligence costs can be charged to the borrower, financed with loan proceeds, or counted toward the required equity injection.

To conceptualize these provisions, let’s say: on a deal at or above $3 million, this work is no longer something that gets trimmed when fees tighten. It is a gating item that determines the earnings figure behind the DSC, the loan amount, and the guaranty. Now, the provider selection needs to happen during the loan-number stage, rather than closer to closing.

What a Quality of Earnings Report Actually Tests

A quality of earnings engagement asks a narrow but consequential question: Is the reported earnings figure real, repeatable, and supportable at the line-item level? It is not an audit, which evaluates whether statements are fairly presented under generally accepted accounting principles and renders a formal opinion at a materiality threshold usually well above the size of the add-backs in question. It is not a valuation, which concludes on price using whatever earnings figure it is handed. Of the three, only the quality of earnings report tests the input itself, tracing adjustments back to invoices, contracts, and payroll records rather than accepting a schedule at face value.

Why Did the SBA Make This Change?

The change reflects a straightforward view of where the government's risk sits. With a change of ownership, new debt is created with no operating track record, intangible assets appear on the balance sheet for the first time, and the person who built the organization is leaving. Every downstream figure in the credit memo, the multiple, the concluded value, the coverage ratio, and the advance rate, traces back to one earnings number.

Consider a $4 million transaction carried at a 4.0 multiple. A $200,000 overstatement in earnings inflates the supportable purchase price by roughly $800,000, more than double a typical 10% equity injection on the same deal. That same $200,000 flows directly into the DSC calculation, and the SOP's remedy is explicit: when the earnings figure does not support the proposed structure, the loan gets smaller. The rule is not asking for a document to sit in a file. It is asking for a number that the SBA can underwrite with confidence.

What This Means Going Forward

The SOP sets a floor for scope, not a ceiling, and there is still no licensing body or standards board governing this work. That leaves scope definition and the engagement letter as the place where quality is either protected or quietly eroded. For lenders, borrowers, and their advisors, the shift means bringing a qualified financial due diligence / QoE team into the transaction earlier, before the loan number is issued, rather than after, so the valuation, the earnings analysis, and the credit decision are built on the same, tested set of numbers from the start.

EisnerAmper's Transaction Advisory Services professionals work with lenders and borrowers on SBA change-of-ownership deals to build quality of earnings reports that meet the new SOP requirements and hold up to a credit committee, an SBA review, and a servicing action years down the line. If you are structuring a transaction that will fall under the new rule, we would welcome the opportunity to talk through the scope before your engagement letter is signed.