IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family businesses. The following blog article has been provided by Pete Miller of Clark Nuber PS (https://clarknuber.com/):

SBA Introduces Quality of Earnings Requirement for Larger Acquisition Loans

For many small business acquisitions, U.S. Small Business Administration (SBA) financing has long been one of the most accessible sources of debt capital available to buyers. That accessibility has historically come with a relatively streamlined underwriting process, compared to what is commonly seen in private equity-backed transactions.

That is about to change for larger SBA-financed acquisitions.

Beginning October 1, 2026, the SBA will require an independent Quality of Earnings (QoE) report for certain change-of-ownership transactions with purchase prices of $3 million or more. The requirement, contained in the SBA’s new Standard Operating Procedure (SOP) 50 10 8.1, represents a significant shift in how acquisition loans will be underwritten and brings aspects of SBA lending closer to underwriting standards commonly found in the middle market.

What Is the SBA and How Does It Impact Business Acquisition Financing?

The SBA is a federal agency whose mission is to support small businesses by improving access to capital, training, counseling, and government contracting opportunities. One of its most important functions is providing guarantees on loans originated by participating lenders.

Rather than lending money directly in most cases, the SBA guarantees a portion of a lender’s loss if a borrower defaults. This guarantee reduces lending risk and encourages banks to finance transactions that might not otherwise qualify under conventional credit standards.

Because the SBA guaranty ultimately exposes taxpayer-backed funds to potential losses, the agency has a strong interest in ensuring that larger acquisition loans are supported by reliable and sustainable cash flow.

What Changed Under SBA SOP 50 10 8.1?

Under SOP 50 10 8.1, the SBA established new requirements for 7(a) loans involving changes of ownership. The guidance creates four transaction categories:

• Initial Acquisition
• Business Expansion
• Owner Buyout
• Employee Stock Ownership Plan (ESOP) and Cooperative Transactions

Initial Acquisition serves as the default classification unless a lender can document that the transaction qualifies for one of the alternative categories.

For transactions categorized as either Initial Acquisition or Business Expansion, a QoE report is now required when the purchase price equals or exceeds $3 million. Importantly, the $3 million threshold is based on the total purchase price before considering buyer equity, seller financing, or other funding sources.

Owner buyouts and ESOP or cooperative transactions are exempt from the new requirement.

When Does the New SBA QoE Requirement Take Effect?

The new rule applies to loans that receive an SBA loan number on or after October 1, 2026. The determining date is not the letter of intent, purchase agreement, application submission, or closing date. Instead, the rule is tied specifically to when the SBA loan number is assigned.

This distinction may become particularly important for transactions currently in the pipeline as buyers, lenders, and sellers evaluate whether they will fall under the new requirements.

What Is a QoE Report?

The SBA defines a QoE report as “an independent financial due diligence report that evaluates the reliability, sustainability, and accuracy of a company’s historical and projected earnings.” The report must be prepared by an independent and experienced financial professional and must be conducted for the benefit of the lender rather than either transaction party.

For many borrowers and advisors who have not previously been involved in private equity transactions, this may be their first exposure to a formal QoE process.

While every provider has its own methodology, the SBA specifically requires analysis of several areas that commonly impact a company’s true cash flow generation, including:

• Non-recurring revenue and expenses
• Owner compensation adjustments
• Related-party transactions
• Deferred maintenance
• Accounting method differences
• Revenue sustainability
• Customer concentration risk
• Contract continuity
• The likelihood that margins and revenue are maintainable after closing

In practice, the required scope is very similar to the work typically performed in a private equity-backed acquisition.

Why Cash Proof Analysis Is Now Required for SBA Acquisition Loans

One notable feature of the SBA requirement is the mandatory inclusion of a cash proof.

A cash proof reconciles bank deposits and withdrawals to the revenues and expenses reported on the company’s financial statements and tax returns. The analysis must cover the trailing twelve months as well as the two prior fiscal years.

This requirement reflects a more forensic approach to validating financial performance. Rather than relying primarily on reviewed financial statements or tax returns, the lender is expected to independently verify that reported earnings are supported by actual cash activity.

How the SBA QoE Requirement Will Impact Underwriting

The practical impact may be greater than simply adding another report to the closing checklist.

The SBA requires lenders to incorporate QoE findings into debt service coverage calculations and to rely on those findings when evaluating both valuation support and debt structure. If the QoE-adjusted cash flow does not support the proposed purchase price or leverage level, the lender may be required to reduce the loan amount or require additional borrower equity.

In other words, the QoE is not merely informational. It becomes part of the underwriting foundation upon which the lending decision is made.

This may also increase collaboration between QoE providers, valuation professionals, lenders, and transaction advisors as they work through adjustments identified during diligence.

What Does This Mean for Buyers, Sellers, and Lenders?

For sellers, the new requirement means reported earnings are likely to receive a higher level of scrutiny than in the past. Issues that may previously have been overlooked or accepted at face value could now be analyzed and adjusted before financing is approved.

For buyers, the change will likely increase the time, cost, and diligence requirements associated with larger SBA-financed acquisitions. However, it may also reduce risk by providing a more thorough understanding of the target company’s financial performance before closing.

For lenders, the requirement introduces a more rigorous underwriting framework and shifts some reliance away from tax returns and reviewed financial statements toward independently verified cash flow analysis.

Key Takeaways on the SBA’s New QoE Requirement

The SBA’s new QoE requirement is ultimately about protecting the SBA guaranty fund and reducing defaults on larger acquisition loans. As transaction sizes increase, the agency is requiring a higher level of financial validation before taxpayer-backed guarantees are extended.

From a broader market perspective, the change represents another step toward aligning larger SBA-financed acquisitions with underwriting practices long used in private equity and middle-market transactions. Independent verification of sustainable cash flow is becoming a core component of the lending process, rather than an optional diligence exercise.

For buyers, sellers, and advisors involved in acquisitions exceeding $3 million, understanding and preparing for the QoE process will soon become an important part of a successful transaction.

If you have questions relating to the content of this article, Pete Miller, CPA, CFE, CM&AA and Shareholder, at Clark Nuber, PS., would welcome the opportunity to connect. Mr. Miller can be reached at (425) 709-6696 or [email protected].

This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.

This article was originally published by Clark Nuber PS and is republished with permission. Copyright © 2026 Clark Number PS. All rights reserved.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.