What the new Quality of Earnings requirement changes about buying a business

What changed

Starting October 1, 2026, under SOP 50 10 8.1, any first-time acquisition or business expansion with a purchase price of $3 million or more needs a Quality of Earnings report before the loan can close. The threshold looks at the business itself, so owner-occupied real estate doesn't count toward it, and owner buyouts and employee-ownership deals sit outside the requirement entirely. If your deal clears that line, the report stops being a nice-to-have. It becomes a gating item, on the same tier as the valuation.

What the report is actually looking for

It helps to know what a Quality of Earnings report is not, because buyers often assume it overlaps with things it doesn't. It isn't an audit, which asks whether the financial statements are presented fairly and works at a materiality level usually far above the add-backs that decide a small deal. It isn't the valuation either, which takes an earnings figure as a given and concludes on price. The Quality of Earnings report does the one thing neither of those does: it interrogates the earnings number itself.

In practice, that means tracing the seller's add-backs back to their source, and pulling apart the things that inflate a number without holding up under scrutiny, like owner compensation that ran above or below market, related-party arrangements, one-time costs quietly treated as recurring, or maintenance that got deferred to make a year look better. It reconciles the accountant's statements, the tax returns, the internal books, and the IRS transcripts into a single normalized earnings figure, and then it tests whether that figure survives contact with reality.

It looks at where the revenue comes from, how concentrated the customer base is, whether the contracts carry forward after a sale, and whether the margins hold once the founder is gone. It also includes a cash proof, matching reported cash against the actual bank statements over the trailing twelve months and the two most recent fiscal years. In other words, it's the diligence a careful buyer would want to do anyway, now written into the rulebook.

You'll probably pay for it, but it isn't your report

Here's the part that tends to catch people off guard. The report has to be commissioned by and prepared for the lender. A version you order yourself doesn't satisfy the requirement, and neither does a seller-side report passed along through a broker. The independence is the whole point, since a report the buyer or seller controls is exactly the report the SBA is trying to move away from.

You can still end up carrying the cost. It can be charged to you, financed into the loan, or counted toward your equity injection. But when it lands, the report answers to the lender's credit file, not to your deal thesis.

How it can move your loan

This is why it matters well beyond the paperwork. Almost every number downstream in your loan traces back to one earnings figure: the multiple, the price you can support, the coverage ratio, and the amount the lender will actually put up. When an independent report normalizes earnings to a lower number than the seller's books implied, that lower number becomes the one your debt service coverage has to clear, and for a first-time acquisition that floor is now 1.25 times, with projections no longer counting toward it.

The leverage here runs in one direction, and it's steep. On a $4 million deal at a 4x multiple, a $200,000 overstatement in earnings supports roughly $800,000 of extra purchase price, which is more than double a standard ten percent equity injection on the same deal. Take that overstatement back out, and the coverage no longer supports the structure, so the loan gets smaller and you close the gap with more cash or a lower price. A soft earnings number doesn't just cost you a cleaner file. It can quietly reset the size of the deal you're able to do.

What to do before you're in it

The buyers who handle this well treat it as something to get ahead of rather than react to.

Run your own earnings analysis early, as a pre-flight. A buy-side report won't check the lender's box, but it surfaces the same problems the lender's report will find, while you still have room to renegotiate the price or walk away. Finding a soft number after the loan is committed is a far worse place to find it than finding it during your own diligence.

Know the timeline, too. Under the Preferred Lender Program, the valuation and the Quality of Earnings work can be completed after the SBA loan number is issued, but both have to be formally engaged, with a firm retained and an engagement letter signed, by the time that number comes through. So the decision about who does this work moves earlier in the process than most buyers expect.

And walk in with your add-backs already clean. The more of the seller's earnings story you can support with invoices, contracts, and payroll records before the report even starts, the less daylight there is between the number you're paying on and the number the lender is willing to underwrite.

The bottom line

None of this turns a good business into a worse one. It just means the earnings figure at the center of your deal now gets checked by someone independent before any money moves, and the buyers who plan for that tend to keep more control over how their deal comes together.

If you're structuring an acquisition that will close after October 1 and want to think through where this lands for your specific deal, we're always glad to talk it through.