The rules for buying a business with an SBA 7(a) loan are about to change. Starting October 1, lenders must obtain a Quality of Earnings report, or QoE, on any acquisitions priced over $3M. That's in addition to the business valuation already required.
Recently, we wrote that a QoE works best as an annual management tool, not a last-minute exercise before a sale. The new rule points in the same direction. Above the new threshold, SBA borrowers no longer get to decide. The report comes with the loan.
Let's talk about what the rule says, how it affects M&A transactions, and what business owners need to do next.
Above the new threshold, SBA borrowers no longer get to decide. The report comes with the loan.
Here's what you need to know about SBA 7(a) requirements.
I'll focus on the essentials. If you'd like to see the full language of the requirement, see Appendix 15 of SOP 50 10 8.1, the rulebook the SBA issued August 14 14 for 7(a) change-of-ownership loans. Now, let's take a look at the points that matter.
- Purchase price comes first. If the price you put on paper exceeds $3M after you subtract the value of any real estate occupied for business purposes, then you're going to a QoE. Equity and financing are not included in the calculation.
- Requirements apply to two deal types. Initial Acquisitions (a new owner buying in) and Business Expansions (an operating business buying another in its industry group). Owner buyouts and ESOP or cooperative transactions are exempt.
- Reports go to lenders. An independent, experienced financial professional must perform the QoE for the lender's benefit. A report prepared by or for a buyer or seller doesn't qualify.
- Reports must be clear and thorough. The report must reconcile accountant-prepared financial statements, tax returns, internal financials, and IRS transcripts to arrive at normalized earnings. It must document every add-back and assess revenue quality, including customer concentration and contract continuity.
- A Cash Proof is required. A cash proof reconstructs cash receipts and disbursements, tying bank statements to the income statement and tax return for the trailing 12 months and the last two fiscal years.
- Numbers drive the loan. The lender must use QoE earnings to calculate debt service coverage.
Requirements apply to loans that receive an SBA loan number on or after October 1st. A file submitted in September but numbered in October falls under the new rules.
Here's how the requirement lines up by transaction type:
| Transaction Type | QoE Required at $3M+? | Minimum Debt Service Coverage |
| Initial Acquisition | Yes | 1.25x |
| Business Expansion | Yes | 1.15x |
| Owner Buyout | No | 1.25x |
| ESOP & Cooperative | No | 1.25x |
Source: SBA SOP 50 10 8.1, Appendix 15.
The driving factors behind the new rule are accuracy and transparency.
So, what do I mean by "transparency"? Well, with an acquisition loan, the loan size could be artificially increased by earnings inflated through add-backs or one-time revenue. A QoE reveals the real revenue numbers to use for valuation and debt service coverage.
In an Initial Acquisition, the person reporting the numbers is leaving. That increases risk for the lender. The QoE puts an independent check between the seller's story and the lender's money.
QoEs stand between the seller’s pitch and the lender’s money.
Note: Owner buyouts and ESOP deals are exempt from the new rule because the existing owners retain operational knowledge of the business.
Three pressure points can turn a QoE from a formality into a delay.
Okay, let's get into the issues that hold up solid deals.
An engagement letter must be in place before the loan number is issued.
For lenders processing under Preferred Lender Program (PLP) authority, the QoE doesn't have to be finished when the SBA loan number is issued, but an engagement letter must be in place.
Without an engaged provider, you cannot get a loan number.
QoE findings can affect loan size.
The findings are what will really impact a deal. Here's why: If the QoE-adjusted earnings don't support the valuation, the lender may reduce the loan amount.
The chart below illustrates how QoE findings affect loans.
| Underwriting Figure | As Reported | After the QoE |
| Adjusted EBITDA | $900,000 | $750,000 |
| Maximum annual debt service at 1.25x | $720,000 | $600,000 |
| SBA loan the earnings support | $3,150,000 | $2,625,000 |
| Gap to cover | $0 | $525,000 |
Hypothetical example. Assumes the same interest rate and loan term in both scenarios.
In this scenario, a $525,000 gap exists between the stated valuation and the QoE findings, and it comes late in the deal process.
A few options are available: The buyer pays more, the seller sells for less, or the seller takes that $525K difference as a "carried note." A carried note means no principal or interest payments over the lifespan of a 7(a) loan, which can be as long as ten years.
Cash Proofs expose sloppy bookkeeping, and that may delay loan approval.
A cash proof shows every gap between bank account balances and reporting, including commingled personal expenses, unreported income, and add-backs with no paper trail.
You must resolve issues before the lender approves the loan. You'll also need to reconcile any differences between cash-basis and accrual accounting.
For sellers, I have five action items to jump on now.
Lenders commission the QoE in sales of $3M or more. You can't control the lender's report, but you can do a sell-side QoE yourself before applying for funding.
Insights from the report will help you correct any discrepancies that could arise later. It's best to solve those problems before you go to market.
- Run your own cash reconciliation first. Pull the trailing 12 months plus the last two fiscal years, then tie every deposit back to reported revenue and the tax returns.
- Paper every add-back. A third party must be able to verify owner compensation, one-time expenses, and any personal costs run through the business.
- Put agreements on paper. Rent paid to a business entity under your ownership, loans from shareholders, or employing family and relatives, meaning they are on the payroll, are all examples of arrangements that need to be formalized.
- Reduce concentration risk where you can. Get key customer relationships under written contracts that will survive a change in ownership.
- Know which side of the line you're on. Carve out the appraised value of any real estate in the sale and see whether the business price still clears $3M. A $3.6M sale that includes the building the business occupies, appraised at $800,000, has a business purchase price of $2.8M.
The list above is the "stabilize before you sell" work we talk about constantly. The new rule puts the SBA's weight behind it.
Buyers and lenders need to respond immediately.
- Classify the deal early. Initial Acquisition is the default category. Document any other classification in the credit memo.
- Engage the QoE provider at the letter of intent, not in underwriting. For PLP files, that engagement letter is on the critical path to a loan number.
- Budget for the QoE up front. QoE costs can be passed to the borrower, financed as an out-of-pocket expense, and counted toward the equity injection.
- Start the document request immediately. Request three years of year-end financials, current- and prior-year interim statements, tax returns, IRS transcripts, and bank statements.
- Revisit files already in the pipeline. If a deal won't receive a loan number by September 30 30, underwrite it to the new rules now.
So, how do we keep deals moving?
Our QoE reporting process is consistent and thorough; we've adapted it to meet the specific requirements of Appendix 1. Here's what we do for our clients:
- Speed up engagement. Make sure the person across the table understands the deal; we won't move forward until an engagement letter is signed.
- Request the documents needed for underwriting. The document list comes directly from the new requirements. We'll produce three years of year-end financials, current and past financial and bank statements, tax returns, and IRS documentation.
- Conduct a cash proof. A cash proof connects bank activity to your books and tax returns. Lenders need to see a consistent story over the trailing 12 months and the last two fiscal years.
- Produce add-back schedules and revenue quality assessments with proper documentation, including customer concentration and contract continuity.
- Show lenders normalized earnings promptly and accurately.
You're an SBA lender with $3M-plus acquisitions in your pipeline, or an owner who wants to know how your earnings will hold up under lenders' scrutiny-let's talk now, while there's still time to get ahead of it. Schedule a discovery call to get started.
Talk soon,
Jeremy A. Johnson, CPA, CEPA®
Founder & CEO
The Novyx Group
Sources
Funder Intel. "SBA SOP 50 10 8.1: 7 Things Brokers Need to Know Before October"1." AccessSeptember 18 18, 2026.https://www.funderintel.com/post/sba-sop-50-10-8-1-7-things-brokers-need-to-know-before-october-1
U.S. Small Business Administration. "Information Notice 5000-880695 Issuance of SOP 50 10 8.1August 14 14, 2026. https://legacy.sba.gov/document/information-notice-5000-880695-issuance-sop-50-10-81
U.S. Small Business Administration. SOP 50 10 8.1: Lender and Development Company Loan Programs. Effective October 1, 2026. https://legacy.sba.gov/document/sop-50-10-lender-development-company-loan-programs
