Beginning October 1, 2026, the SBA will require an independent Quality of Earnings (QoE) report for certain business acquisitions with a business purchase price of $3 million or more. For SBA lenders, the new requirement adds an important step to the due diligence and underwriting process.
What SBA Lenders Need to Know
- Effective date: The requirement applies to loans with SBA loan numbers issued on or after October 1, 2026.
- Qualifying Transactions: Initial Acquisitions and Business Expansions with a business purchase price of $3 million or more require a QoE report. Owner-occupied real estate is excluded when determining the threshold. Owner Buyouts and ESOP/co-op transactions are exempt from the QoE requirement.
- Lender-commissioned report: The QoE must be performed by an independent financial professional for the lender’s benefit. A buyer- or seller-commissioned report does not satisfy the requirement.
- Underwriting impact: Lenders must use the QoE-adjusted earnings in the debt service coverage calculation, meaning findings from the report could affect loan sizing.
- Timing considerations: Lenders should identify qualifying transactions and engage a QoE provider early enough to incorporate the findings into underwriting without unnecessarily delaying the transaction.
What the New Requirement Means
A Quality of Earnings report provides an independent assessment of a business’s historical earnings and cash flow, helping determine whether reported earnings are accurate, recurring and sustainable.
Under the new SBA requirements, the analysis is expected to include several areas of financial diligence, including:
- A cash proof reconciling bank activity to reported financial results for the trailing 12 months and prior two fiscal years
- Validation of reported and normalized EBITDA, including support for proposed adjustments and add-backs
- Analysis of revenue quality, customer concentration and continuity of customer relationships and contracts
- Documentation of recurring and nonrecurring adjustments
The resulting normalized earnings figure becomes an important part of the lender’s underwriting analysis.
Why Timing Matters
For affected transactions, QoE should become part of the conversation early rather than an additional step near the end of underwriting.
The report must be completed before the lender can finalize its analysis using QoE-adjusted earnings. Depending on the complexity of the transaction, the process can add time to the due diligence and underwriting timeline.
Identifying transactions that trigger the requirement early can give lenders, buyers and their advisors more time to coordinate diligence, address potential earnings adjustments and avoid unnecessary delays as a transaction moves toward closing.
With the effective date approaching, now is the time for SBA lenders to consider how the new QoE requirement will fit into their existing acquisition and underwriting processes.
HoganTaylor’s Transaction Advisory team works with lenders and transaction stakeholders to provide independent Quality of Earnings analysis and financial due diligence. If you have questions about how the new SBA requirement may affect an upcoming transaction, contact our team to start the conversation.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
