As the market for small business acquisitions continues to grow, the U.S. Small Business Administration (SBA) is introducing new due diligence requirements for certain transaction types. Beginning October 1, 2026, a Quality of Earnings (QoE) analysis is required for many larger SBA 7(a) acquisition loans, adding a new layer of financial review to the underwriting process.
For buyers, lenders and advisors, understanding these requirements and planning ahead will be critical to keeping transactions on track.
What Has Changed Under the SBA’s New Rules?
The SBA’s updated Standard Operating Procedure (SOP 50 10 8.1) requires lenders to obtain an independent Quality of Earnings report for certain change-of-ownership and business expansion transactions. Specifically, the requirement applies when the business purchase price is $3 million or greater.
The QoE report now becomes a required component of the lender’s underwriting file, alongside the business valuation already required for SBA 7(a)-financed acquisitions.
Additional SBA guidance released in September 2026 clarified that the required scope of the Quality of Earnings analysis remains unchanged. The SBA did not ease or reduce any of the required review procedures outlined in the updated SOP. The guidance also introduced a practical alternative for buyers who have already commissioned a Quality of Earnings report. Rather than requiring a second full analysis, lender may rely on a buyer-procured QoE if it is reviewed by one of the lender’s approved third-party providers before being incorporated into the underwriting process.
How the $3 Million Threshold Is Determined
The purchase price threshold is evaluated before accounting for buyer equity contributions, seller financing or other funding sources. In other words, transaction structures cannot be adjusted to avoid the requirement.
Additionally, the appraised value of owner-occupied real estate is excluded when calculating the purchase price, meaning the focus remains on the operating business itself.
Are Any Transactions Exempt?
Certain transaction types are excluded from the QoE requirement, including:
- Owner buyout transactions
- Employee Stock Ownership Plan (ESOP) transactions
- Cooperative transactions
These exemptions generally apply because existing ownership and operational knowledge remain in place after the transaction.
What Is a Quality of Earnings Report?
A Quality of Earnings report is a financial due diligence analysis designed to evaluate the sustainability and accuracy of a company’s earnings. Unlike a financial statement audit or review, a QoE focuses on understanding what the business is truly generating on an ongoing basis and identifying adjustments that may affect future performance.
For buyers and lenders, a QoE provides a clearer picture of cash flow, profitability and financial risk before completing a transaction.
Key Areas Evaluated in a QoE
Under the SBA’s new requirements, the analysis must include:
- Reconciliation of financial statements, tax returns and supporting records
- Verification of cash receipts and disbursements
- Evaluation of non-recurring revenue and expenses
- Review of owner compensation adjustments and related-party transactions
- Analysis of customer concentration and revenue sustainability
- Assessment of accounting method differences and other earnings adjustments
The ultimate goal is to develop a normalized earnings figure that more accurately reflects the business’s ongoing operating performance.
Why the SBA Is Requiring More Financial Due Diligence
The SBA’s updated approach reflects the increasing volume and complexity of acquisition financing in the lower middle market. As transaction activity grows, lenders need greater confidence that projected cash flow and debt service assumptions are supported by reliable financial information.
An independent QoE can help validate earnings, identify risks early and provide a more objective foundation for underwriting decisions. Under the new rules, lenders must use the QoE-adjusted earnings in their debt service coverage analysis.
The QoE Can Change How Much You Can Borrow
The lender underwrites to the QoE number, not the seller’s. Under SOP 50 10 8.1, the debt service coverage floor goes to 1.25x for initial acquisitions and projections no longer count.
So, when the QoE rejects an add-back, cash flow drops and the loan drops with it. The gap can be filled one of three ways:
- More equity from the buyer
- A lower purchase price
- More seller financing
Buyers should pressure-test the seller’s add-backs before the lender’s QoE does and put language in the LOI for what happens if the QoE comes in light.
How the New Requirement May Affect Acquisition Timelines
While a Quality of Earnings analysis can provide valuable insights, it also introduces additional planning considerations.
Buyers Should Plan Earlier
Acquirers pursuing SBA 7(a) financing for transactions above the threshold should anticipate:
- Additional due diligence costs
- More documentation requests
- Extended timelines for financial review
- Increased coordination between lenders, advisors and sellers
Buyers who anticipate pursuing SBA financing may also benefit from coordinating with prospective lenders before engaging a QoE provider. Under the SBA’s recent guidance, an existing buyer-paid QoE may be acceptable if reviewed by a lender-approved vendor, potentially reducing duplicate work and helping streamline the diligence process.
Starting the process early can help prevent delays as the transaction approaches closing.
Lenders Should Establish Processes in Advance
Lenders may also need to update internal underwriting procedures, identify qualified QoE providers and determine how the findings will be incorporated into their credit analysis process.
Why an Independent Quality of Earnings Matters
One of the most important aspects of the SBA rule is independence. The QoE must be prepared by an experienced third-party financial professional. While the lender remains responsible for ensuring the report meets SBA requirements, recent guidance indicates that a buyer-paid QoE may be acceptable if it is reviewed by a lender-approved provider before being used in the underwriting process.
To satisfy this requirement, the report must be independently prepared. Reports prepared by or for the borrower or seller, including seller-side reports distributed through brokers, are not acceptable.
This independence helps strengthen confidence in the earnings analysis and supports more informed lending and acquisition decisions.
How a Quality of Earnings Analysis Creates Value Beyond Compliance
Although the new requirement is regulatory in nature, many buyers already use QoE analyses as part of their acquisition strategy. A well-executed report can help stakeholders:
Validate Purchase Price Assumptions
Buyers can gain a clearer understanding of recurring earnings and whether the proposed valuation reflects economic reality.
Identify Potential Risks
Issues such as customer concentration, margin pressures, accounting inconsistencies or unusual transactions can be identified before closing.
Support Post-Acquisition Planning
The findings may also reveal operational opportunities and financial improvements that can help create value after the transaction is complete.
How Boulay Can Help
Purchasing a business involves more than reviewing historical financial statements. A Quality of Earnings analysis can provide deeper insight into profitability, cash flow and potential risks, helping buyers and lenders make more informed decisions.
Boulay’s Transaction Advisory team works with business owners, investors, search funds and acquisition stakeholders to evaluate financial performance, identify key risks and support transaction due diligence efforts. Whether you’re preparing for an SBA 7(a)-financed acquisition or seeking greater confidence in a potential investment, our team can help you navigate the process with clarity and confidence.
Take the Next Step
As the SBA’s new Quality of Earnings requirement takes effect, proactive planning will become increasingly important for buyers, lenders and advisors. Engaging the right due diligence professionals early can help avoid delays, support underwriting requirements and provide a clearer picture of the business you’re evaluating.
Connect with Boulay’s Transaction Advisory team to discuss how a Quality of Earnings analysis can support your acquisition strategy and financing objectives.