Beginning Oct. 1, 2026, certain Small Business Administration (SBA) 7(a) business acquisitions will require an independent quality of earnings (QoE) report under standard operating procedure (SOP) 50 10 8.1.

For SBA lenders, this change adds a formal financial due diligence requirement and reinforces the importance of understanding whether a target company’s reported earnings are reliable, recurring and sufficient to support proposed debt.

When Is a QoE Report Required?

Under the updated SOP, qualifying initial acquisition and business expansion transactions with a business purchase price of $3 million or more require an independent QoE report in addition to a business valuation. The threshold is based on the business purchase price, excluding owner-occupied real estate.

The report must be obtained for the benefit of the lender. A QoE prepared for the buyer or seller does not replace the lender-commissioned report required under the SOP.

How a QoE Supports the Lending Process

A business valuation addresses the question: What is the business worth? A QoE addresses a different question: How dependable are the earnings supporting that value and the borrower’s ability to repay the loan?

A QoE analyzes the company’s historical financial performance and evaluates whether reported earnings accurately reflect sustainable cash flow. The process may include analysis of:

• Revenue and margin trends
• Customer concentration
• Owner compensation and discretionary expenses
• Nonrecurring expenses and proposed add-backs
• Differences between financial statements and tax returns
• Cash receipts and disbursements
• Other factors affecting normalized earnings

SOP 50 10 8.1 also calls for a cash proof that reconciles cash activity to reported financial results for the trailing 12-month period and the two most recent fiscal years.

This analysis can help lenders identify issues that may not be apparent from financial statements alone.

Why Earnings Quality Matters

The updated SOP places greater emphasis on historical or adjusted earnings when evaluating debt service coverage. For initial acquisitions, the revised framework generally requires a minimum 1.25-to-1 debt service coverage ratio based on historical or adjusted earnings.

A company may report strong earnings before interest, taxes, depreciation and amortization (EBITDA), but a closer review could reveal that:

• Revenue is concentrated among a small number of customers.
• Proposed add-backs are not truly nonrecurring.
• Margins have declined.
• Reported sales do not reconcile to cash receipts.
• Certain owner expenses will continue after closing.
• Recent performance differs significantly from historical results.

These findings may affect normalized earnings, debt service coverage, valuation or the structure of the transaction. Identifying them early can help prevent delays and support a more informed credit decision.

Preparing for the New Requirement

Lenders should begin incorporating QoE procedures into their acquisition workflows before the new SOP takes effect. This may include identifying qualified providers, updating document request lists and determining when the QoE should begin.

Because the process typically requires detailed financial records, including bank statements, tax returns and internal financial statements, starting early is essential.

Even when a QoE is not mandatory, lenders may benefit from additional earnings analysis when a transaction involves complex add-backs, inconsistent financial reporting, customer concentration or other potential risks.

How We Can Help

Doeren Mayhew provides QoE and financial due diligence services to help SBA lenders evaluate the financial performance behind business acquisitions. Our pros look beyond reported EBITDA to assess earnings trends, validate adjustments and identify factors that may affect sustainable cash flow. As SBA lenders prepare for SOP 50 10 8.1, a lender-focused QoE can help strengthen underwriting, identify risks earlier and support greater confidence in the transaction.