Key topics covered in this article:

• QoE reports become mandatory for larger SBA transactions. Beginning October 1, 2026, SBA 7(a) business acquisition and expansion loans with purchase prices of $3 million or more will generally require a lender-ordered Quality of Earnings (QoE) report, making financial due diligence a formal underwriting requirement.
• Historical earnings, not projections, drive loan approval. The QoE report will validate earnings, test add-backs, reconcile financial activity, and establish the earnings figure used to calculate debt service coverage, giving lenders greater confidence in repayment capacity.
• The requirement is about reducing lending risk, not just compliance. By providing deeper insight into earnings quality, cash flow, customer concentration, margins, and sustainability, QoE reviews help lenders identify risks earlier, strengthen underwriting decisions, and reduce surprises after closing.

The Small Business Administration (SBA) is raising the financial due diligence requirements for certain 7(a) business acquisition loans. Effective October 1, 2026, SBA SOP 50 10 8.1 will require a lender-ordered Quality of Earnings (QoE) report for certain business acquisitions and expansions with purchase prices of $3 million or more. The lender must order the report, and the earnings determined through the QoE become the basis for the lender’s debt service coverage calculatio

For lenders, this can be viewed as a positive development. Financial statements, tax returns, and valuation work remain important parts of underwriting. A QoE report provides additional context by examining how reported earnings were generated and how they align with underlying financial activity. That visibility can reduce uncertainty and support more informed, confident credit decisions.

The Challenge With SBA Acquisition Lending

Acquisition lending depends heavily on historical financial performance. Lenders typically review financial statements, tax returns, and other supporting records to evaluate the earnings and cash flow available to repay the proposed debt. Those records provide an important starting point, but they may not offer enough context.

Lenders often need answers to additional questions such as:

• Do reported revenue and earnings reconcile to tax returns and cash activity?
• Are seller-proposed add-backs and adjustments supported by the financial records?
• What portion of historical earnings reflects the ongoing operations of the business?
• Are recent changes in revenue or margins sustainable?
• Does the financial information support the earnings used to calculate debt service coverage?

Under the new SBA requirements, the QoE becomes the process for digging into those questions and validating the earnings used in underwriting.

Key Takeaway: Financial statements rarely tell the full story, and lenders often need deeper insight into the sustainability and reliability of reported earnings.

How a QoE Review Reduces Uncertainty

SOP 50 10 8.1 creates a more formal process for reviewing the earnings behind larger SBA acquisition loans. One important change is who controls that process. Previously, the buyer could obtain the QoE report. Now the lender must order it, shifting control of the engagement to the party that will use the analysis in underwriting. The lender selects an independent provider and obtains a report focused on the financial information needed to evaluate the loan.

Additionally, several aspects of the new QoE requirement directly affect how lenders evaluate acquisition loans:

Reconciliation and cash proof. The report must reconcile the seller’s financial statements to bank statements and tax filings. The cash proof covers the trailing 12 months and the prior two fiscal years. Differences between reported revenue, tax filings, and actual cash activity should be identified and explained before the lender relies on the earnings figure.

Add-backs and adjustments. Sellers commonly adjust EBITDA for owner compensation and other discretionary costs to arrive at normalized earnings. The QoE tests whether those adjustments are supported by the underlying records and whether they are reasonable for underwriting purposes. That analysis can directly affect debt service coverage because unsupported adjustments reduce the normalized earnings available to support the proposed debt.

Debt service coverage. Under SOP 50 10 8.1, an initial acquisition generally must demonstrate at least 1.25x debt service coverage using historical or adjusted earnings. Lenders may use the most recent fiscal year or an average of the prior two fiscal years, but projected post-closing earnings cannot be used to meet the requirement. For transactions requiring a QoE, the earnings supported by the report become the basis for determining whether the loan meets the required coverage level.

Quality and sustainability of earnings. Because projected earnings are no longer an option, lenders will need even greater confidence in historical earnings. The QoE also looks at factors such as customer concentration, contract terms, margin trends, and changes in performance to help assess the sustainability of those earnings.

Support for the earnings used in underwriting. The QoE should provide a documented basis for the earnings figure used in the credit analysis, including how reported results were reconciled and which adjustments were accepted or rejected.

Key Takeaway: There is inherent uncertainty in acquisition lending. The new SBA requirement creates a more formal way to investigate it.

The Opportunity Beyond Compliance

For lenders, the value of a QoE extends beyond satisfying a new SBA requirement. The analysis can provide a clearer view of the earnings and financial activity supporting repayment before the loan is approved.

That additional context can help lenders identify issues earlier in the underwriting process, validate assumptions that support the transaction, and better understand where financial risk may exist. It can also give lenders a stronger basis for discussing concerns with borrowers before those concerns become problems after closing.

In some cases, the QoE may confirm that reported performance and proposed adjustments are well supported. In others, it may uncover discrepancies or trends that warrant further review. Either way, the lender has more information before capital is committed.

Key Takeaway: Better financial diligence can lead to better lending decisions and fewer surprises after funding.

What Lenders Should Do Now

With SOP 50 10 8.1 taking effect for loans assigned an SBA loan number on or after October 1, 2026, lenders should take a proactive approach in the following areas:

• Identify affected transactions early. Determine which acquisitions and business expansions will require a QoE under the new threshold and transaction classifications.
• Build the QoE into the underwriting timeline. Allow enough time for the provider to obtain records, perform the required analysis, and address questions that arise during the review.
• Engage an experienced independent provider. The SBA has not established a credentialing list for QoE providers. Financial due diligence experience and independence should therefore be important considerations in selecting a provider.

Contact Us

As lenders prepare for the new requirements, financial due diligence services can provide the context needed to evaluate complex SBA acquisition loans. Establishing a process and identifying an independent provider now can help lenders prepare for qualifying transactions after the October 1 effective date.

PBMares combines tax, accounting, valuation, and transaction expertise to help lenders assess what is behind the numbers. For more information about Quality of Earnings reports and financial due diligence for SBA acquisition loans, contact any of of PBMares Transaction Advisory Leaders, Consulting Service Line Leader Matt Joergensen, Partner and Business Valuations Team Leader Dwight Buracker, Partner and Outsourced Accounting Team Leader Brad Jones, or Tax Partners Ryan Paul and Jeremy Roberts.