Starting October 1, 2026, SBA lenders must obtain an independent SBA Quality of Earnings report for certain 7(a) acquisition loans of $3 million or more. For buyers, this report can affect loan size, required equity, and the closing timeline. Below, we provide an SBA Quality of Earnings checklist to help buyers and lenders understand the review process, prepare the necessary documentation, and avoid unnecessary delays.
Peak Business Valuation regularly works with SBA lenders and business buyers on Quality of Earnings analyses. We can help you understand what the review requires and organize your records before the lender sets the scope. If you have questions about an SBA Quality of Earnings, schedule a free consultation below.
When Does a Buyer Need an SBA Quality of Earnings Report?
The SBA Quality of Earnings requirement comes from SOP 50 10 8.1, effective October 1, 2026. It applies to Initial Acquisition and Business Expansion transactions when the Business Purchase Price is $3.0 million or more. When the purchase price meets or exceeds that amount, the lender must obtain an SBA QoE in addition to the business valuation.
To determine whether a transaction meets this threshold, lenders must first calculate the Business Purchase Price under SBA guidelines. They measure this amount before buyer equity, seller debt, or other funding. If the deal includes owner-occupied commercial real estate, the lender subtracts its appraised value from the price. The loan amount does not control this test. Buyers should therefore confirm with their lender whether the SBA Quality of Earnings requirement applies to their deal.
How Should Buyers Prepare for an SBA Quality of Earnings Review?
Buyers can take several steps to prepare for an SBA Quality of Earnings review. This checklist covers nine steps, starting with three that focus on gathering records and avoiding delays.
1. Confirm the Lender’s Requirements
The lender sets the requirements for the SBA Quality of Earnings review. As such, these requirements may vary from one lender to another. Buyers should ask their lender who can prepare the report, what it must cover, which periods it should review, and when it is due. This will help buyers set clear expectations for the review process.
2. Organize Financial Records
Next, providing the analyst with complete, organized financial data helps streamline the review process. Buyers should work with the seller to gather the following records:
- Financial Statements: Gather monthly and annual income statements and balance sheets, including any prepared by the seller’s accountant.
- Tax and Ledger Records: Collect federal tax returns, general ledgers, and trial balances, and work with the lender to obtain IRS transcripts.
- Account Records: Request complete bank, merchant, business credit card, and payroll records.
- Add-Back Support: Obtain the seller’s add-back list along with invoices, leases, customer sales reports, and major contracts.
- Balance Sheet Detail: Request detail on unpaid customer invoices, unpaid vendor bills, inventory, debt, and customer deposits.
Buyers should also group files by company and period and identify any related companies that collect sales, pay staff, or share costs. For more guidance, see SBA Quality of Earnings Documents: What You Need to Provide.
3. Prepare for the Cash Proof
Buyers can help prepare for the SBA Cash Proof. This analysis reviews cash receipts and payments to reconcile bank records with financial statements and tax returns. Under SOP 50 10 8.1, the review covers the trailing twelve months (TTM) and the prior two fiscal years. However, a shorter review period may apply to businesses that have operated for less than two years.
Buyers should ask the seller to list every business account used during those periods, including closed accounts. The seller should also explain transfers, loan proceeds, owner contributions, and other deposits that are not sales.
What Should Buyers Review in the Seller’s Earnings?
Once buyers have gathered the needed records, they should review the seller’s earnings. The next four steps cover add-backs, ongoing costs, customer relationships, and financial trends.
4. Test the Seller’s Add-Backs
For each add-back, buyers should request the amount, date, reason, and supporting records. This matters because an invoice may prove that a cost occurred, but it does not show whether the buyer can avoid that cost after closing.
For example, advisory fees and family payroll may still be needed to run the business after closing. Buyers should also ask what the owner does each day and who will take over those duties. If the buyer must hire someone to replace the owner, that cost should be reflected in adjusted earnings. These are some of the issues covered during SBA add-back verification.
5. Identify Costs That Reduce Earnings
An SBA Quality of Earnings may also find costs that the seller’s schedule leaves out. For instance, rent may be below market, family members may work without pay, or a low-cost supplier contract may end soon. Each of these issues can lower the earnings a buyer acquires. Reviewing the proposed lease, staffing plan, and known repair needs early helps buyers separate ongoing costs from one-time cash needs.
6. Review Customer and Contract Continuity
Customer records help buyers assess whether sales will continue after closing. Buyers should review monthly sales by customer, new and lost accounts, price changes, and major contracts. They should also ask whether key customers rely on the seller personally or whether contracts could end after the sale. This matters because losing a major customer could reduce future revenue and earnings. If a major customer is expected to leave, the analyst can estimate the lost earnings after accounting for costs the business can avoid.
7. Compare Monthly Trends and Margins
Monthly results help separate seasonal changes from growth or decline. Buyers should compare monthly revenue, gross margin, payroll, and operating expenses across the TTM period and prior fiscal years. If margins improved recently, the analyst can test the reasons against pricing, purchasing, and payroll records.
If you have questions about the seller’s earnings, Peak Business Valuation is happy to help. Our financial analysts can review the records with you and explain what an SBA Quality of Earnings may test. Schedule a free consultation below to get started.
How Should Buyers Plan for Closing?
Beyond reviewing earnings, buyers should consider how an SBA Quality of Earnings review may affect their cash needs and financing. The final two steps break down what buyers should review before closing and how to work with their lender.
8. Identify Working Capital and Other Cash Needs
A business can earn a profit and still need cash when customers pay slowly or inventory sits unsold. Buyers should review unpaid customer invoices, overdue vendor bills, customer deposits, and other amounts owed. This helps them understand how much cash the business may need to operate after closing.
Buyers should also confirm which assets and debts will transfer as part of the sale. They should review working capital, debt-like obligations, and future capital spending separately from earnings adjustments to avoid counting the same item twice.
9. Ask Whether a Buyer QoE Can Be Used
Some buyers order a Quality of Earnings report before their lender requests one. Under SOP 50 10 8.1, a lender may have an approved provider review a buyer-commissioned QoE. The report must be independent and prepared for the lender’s benefit. The seller cannot order or prepare it.
Before ordering a QoE, buyers should confirm whether their lender will accept this approach and whether more testing is needed. This can help avoid duplicate costs and delays.
Conclusion
Following this SBA Quality of Earnings checklist can help buyers prepare for the review and address financial issues before they affect loan approval or closing. By gathering complete records, reviewing the seller’s earnings, and planning for cash needs, buyers can better understand the financial health of the business before moving forward with an acquisition.
Peak Business Valuation works with SBA lenders and business buyers on Quality of Earnings analyses across the country. If you have any questions about how we can assist with your acquisition or an SBA QoE, schedule your free consultation with Peak Business Valuation.
