New SBA Quality of Earnings Requirements: What Business Owners Need to Know
Quality of Earnings reports have traditionally been associated with larger M&A transactions.
That's about to change for certain small business acquisitions.
Effective October 1, 2026, SBA SOP 50 10 8.1 introduces new Quality of Earnings requirements for certain SBA 7(a) business acquisitions.
For business owners considering a sale, this is worth understanding before a buyer is already in due diligence.
What Is a Quality of Earnings Report?
A Quality of Earnings, or QoE, is an independent financial due diligence report that examines the reliability, sustainability, and accuracy of a company's historical and projected earnings.
In simple terms, it tries to answer a very important question:
How much of the business's reported earnings are real and likely to continue?
That's different from simply reviewing a tax return or profit and loss statement.
A QoE takes a deeper look at the financial performance of the business and the assumptions behind the numbers.
What Does the New SBA Requirement Mean?
Under SBA SOP 50 10 8.1, a required QoE must be performed by an independent qualified financial professional and conducted for the benefit of the lender.
One particularly important component is the Cash Proof.
The SBA defines this as an independent reconstruction of cash receipts and disbursements by reconciling bank statement data to the income statement and tax return for each period being reviewed.
That's important.
A seller can explain the financial statements. A CPA can prepare a tax return.
But a Cash Proof looks at whether the underlying movement of cash supports the earnings being presented.
Why Add-Backs May Get More Attention
Add-backs are already one of the areas I spend a lot of time discussing with business owners.
A seller may believe an expense is personal, discretionary or nonrecurring.
A buyer or lender may see it differently.
A QoE puts more scrutiny around those adjustments.
If you're claiming an expense should be added back to earnings, you should be able to identify it, document it and explain why a new owner wouldn't incur the same expense.
The goal shouldn't be to create the largest possible adjusted earnings number.
It should be to arrive at an earnings number that can be supported.
What Should Business Owners Do Now?
You don't need to be selling your business today to take something from the new SBA requirements.
Take a look at your financials.
Do your tax returns, P&Ls and bank activity tell the same story?
Can you support your add-backs?
Are there unusual expenses or revenue items that would require an explanation?
Are personal and business expenses clearly separated?
These are good practices regardless of whether an SBA loan is involved.
And if you're considering selling a business that may be financed through an SBA 7(a) loan, addressing these issues before due diligence can make the process much easier.
The Bigger Picture
The new SBA Quality of Earnings requirements reinforce something that has always mattered in a business sale:
It's not enough to show earnings.
You need to be able to support them.
The cleaner and more transparent the financial picture is, the easier it is for a buyer, lender and advisor to understand what the business is actually earning.
For business owners thinking about an eventual exit, that's a conversation worth having well before the business goes to market.