Quality of earnings is now required on 7(a) deals of $3 million or more
SOP 50 10 8.1 takes effect October 1, 2026. Here is what the new requirement says, what a compliant report must contain, and how a QoE and the required business valuation can be delivered as one coordinated engagement.
SOP 50 10 8.1 adds a second piece of independent third-party financial work to larger acquisition files. For business expansion and initial acquisition transactions where the purchase price is equal to or greater than $3 million, the lender must obtain a Quality of Earnings analysis in addition to the required business valuation. Most lenders we speak with have not commissioned one before, and the vendor pool that can produce a compliant report is thinner than the volume the rule will create.
What changed
The threshold is measured on the purchase price before the application of buyer equity, seller debt, or other financing sources. A deal that closes with a modest note amount can still sit above the line, so the test is worth running at intake rather than at underwriting.
Owner buyout and ESOP & cooperative transactions are excluded. The SOP’s reasoning is that existing ownership retains operational knowledge of the business and the transaction does not change the management or operating structure.
In plain terms: On a $3 million-plus acquisition, the valuation alone no longer carries the earnings question. A separate, lender-engaged analyst must show the earnings are real, recurring, and supported by the bank statements — and the DSC calculation must use that number.
- Initial acquisition, purchase price of $3M or more
- Business expansion, purchase price of $3M or more
- Measured before equity, seller debt, or other financing
- Owner buyout transactions
- ESOP & cooperative transactions
- Business valuation requirements still apply as usual
What a quality of earnings analysis is
A QoE is a financial due diligence report that examines the reliability, sustainability, and accuracy of a business’s historical and projected earnings. It is not an opinion of value, and it is not an audit. It answers a narrower question: how much of the reported profit is real, recurring, and likely to survive the sale?
Two constraints govern who may prepare it. The analysis must be performed by an independent, experienced financial professional, and it must be conducted for the benefit of the lender. Because the QoE is part of the transaction’s financial due diligence, the report may not be prepared by or for the borrower or seller. A sell-side QoE commissioned by the seller’s advisor does not satisfy the requirement, however thorough it is.
What the report must contain
The SOP sets out four substantive requirements. A report that omits any one of them is unlikely to hold up on review.
Accountant-prepared financial statements, tax returns, internal financial statements, and IRS transcript data are reconciled to one another to produce an adjusted earnings figure that reflects recurring, arm’s-length operations. Where the four sources disagree, the report explains why.
A reconstruction of cash receipts and disbursements that ties bank statement data to the income statement and the tax return for each period under review, designed to surface unreported income and undisclosed expenses. Required on both a trailing 12-month basis and the last two fiscal years.
This is the most document-intensive element of the engagement and the most common cause of delay. Request complete bank statements for every operating account, for all three periods, at application.
Every adjustment to the seller’s reported earnings is identified and documented — non-recurring revenue and expenses, above- or below-market owner compensation, related-party transactions, deferred maintenance, and cash-basis versus accrual-basis methodology differences.
The report also assesses the durability of the revenue base itself: customer concentration risk, contract continuity, and the likelihood that revenue and margins hold post-sale.
The lender must use the earnings from the QoE in the debt service coverage determination, and retain the report in the credit file. In practice, the QoE number — not the seller’s stated cash flow, and not a separately derived valuation cash flow — becomes the credit decision’s earnings basis.
What that means for your file: If the QoE’s adjusted earnings differ from the cash flow used in the business valuation, the file now holds two numbers a reviewer will compare. Coordinating the two engagements is the cleanest way to make sure any difference is explained rather than discovered.
Two reports, one data set
The two deliverables answer different questions but draw on substantially the same records. Ordering them separately means the borrower assembles the same package twice, two analysts normalize earnings independently, and the file inherits whatever gap opens between them.
| Quality of earnings | Business valuation | |
|---|---|---|
| Core question | Are the earnings real, recurring, and supported by cash? | What is the business worth, and is the price supportable? |
| Primary evidence | Bank statements, tax returns, IRS transcripts, internal statements | Normalized earnings, market data, transaction terms, risk factors |
| Output | Adjusted, normalized earnings and a cash proof | Conclusion or opinion of value |
| Engaged by | The lender only — never the borrower or seller | The lender, per SBA independence requirements |
| Used for | The DSC determination; retained in the credit file | Purchase price support and collateral analysis |
The bundled engagement
- One document request. A single combined list goes to the borrower and seller once, rather than two overlapping requests weeks apart.
- One reconciled earnings figure. The normalized earnings developed in the QoE feed the valuation’s cash flow directly, so the two reports agree by construction.
- One lender engagement. Both reports are engaged by and addressed to the lender, which is what the independence language in the SOP requires.
- One point of contact. Follow-up questions, credit committee questions, and post-close file review are handled by the analyst who built both files.
- Deliverables sequenced to the credit process. Findings that affect the credit decision are raised as they surface, not held for final delivery.
Fees
A quality of earnings engagement typically ranges from $7,500 to $12,000, depending on the complexity of the business — the number of operating accounts and entities, the condition of the books, revenue model and transaction volume, and the extent of related-party activity. A fixed fee is quoted at engagement, once the document package has been scoped.
Bundled pricing: When the business valuation and the quality of earnings are engaged together, the combined fee is discounted — the document request, intake, and earnings normalization are performed once rather than twice, and that efficiency is passed through. Ask for a bundled quote when the file opens.
What to request at application
Requesting these items when the file opens — rather than when the QoE is ordered — is the single largest lever on turnaround.
- Business tax returns, last three fiscal years
- IRS transcripts matching those returns
- Accountant-prepared statements, last three fiscal years
- Internal statements and trial balances, TTM and interim
- General ledger detail for the periods under review
- Bank statements, all operating accounts, TTM plus two fiscal years
- Merchant processor and point-of-sale settlement reports
- Revenue detail by customer, and A/R and A/P aging
- Payroll registers and owner compensation detail
- Material contracts, leases, and related-party agreements
Engage early: Ordering the QoE alongside the valuation — rather than after credit approval is drafted — keeps the earnings question in front of the deal instead of behind it. Files that surface a cash proof discrepancy late are the ones that reprice or die.
Questions lenders are asking
No. The report may not be prepared by or for the borrower or seller, and must be conducted for the benefit of the lender. A buyer-commissioned report may still be useful background, but it does not satisfy the requirement.
The SOP requires independence from the borrower and seller and engagement by the lender; it does not require that the two reports come from different firms. Where a lender’s own credit policy calls for separation, the engagements can be scoped and staffed accordingly — raise it at engagement, not at delivery.
The QoE figure is what the DSC determination must use. That may change structure, price, or the credit decision — which is precisely why the number should be developed early and discussed before the credit memo is finalized.
The requirement is written to business expansion and initial acquisition transactions at or above the threshold. Owner buyout and ESOP & cooperative transactions are carved out. Where the structure is ambiguous, document the classification reasoning in the file.
It is expected, and the SOP requires the report to address accounting methodology differences between cash-basis and accrual-basis reporting as part of the adjustments. It typically lengthens the analysis rather than preventing it.
The material in this article is informational and is not legal advice. It summarizes provisions of SBA SOP 50 10 8.1 effective October 1, 2026; the SOP itself governs. Lenders should follow SBA requirements and consult counsel as needed.
Bring a live deal or a hypothetical. We will walk through whether the QoE requirement applies, what the document package looks like, and how the two reports can be sequenced to your credit timeline.
