INSIGHT

What Borrowers and Lenders Need to Know Before the SBA’s Quality of Earnings Deadline

Craig Hamm • September 3, 2026

Services: Quality of Earnings

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Buying or expanding a business with an SBA-backed loan just got a new checkpoint. Starting October 1, 2026, the SBA will require an independent quality of earnings report on 7(a) change-of-ownership loans once a deal reaches $3 million in enterprise value. This article walks through who the rule affects, what the report must cover, and how borrowers and lenders can prepare before the change takes effect.

Why the SBA Added This Requirement

For years, a quality of earnings analysis sat in the “nice to have” column on SBA deals. Lenders often skipped it, especially on smaller transactions, and leaned on tax transcripts and appraisals instead. Those tools answer a narrower question than most people assume. A tax transcript confirms what was filed, not whether the underlying earnings are accurate or likely to repeat. An appraisal works from the financials it’s handed, without testing whether those numbers hold up.

That gap matters because a change-of-ownership loan carries real risk for the government. New debt gets layered onto a business with no operating history under the incoming owner, and the person who built the company is walking out the door. Every figure that follows, the loan amount, the coverage ratio, the guaranty, traces back to one number: reported earnings. If that number is wrong, everything built on top of it is wrong too.

Who the New Rule Applies To

The requirement, issued under SOP 50 10 8.1, applies to initial acquisitions and business expansions priced at $3 million or more in purchase price. Owner buyouts and ESOP or cooperative conversions are exempt, since the existing owner stays involved and already knows the business from the inside.

Purchase price, for this purpose, is the amount stated in the purchase and sale agreement, minus any owner-occupied real estate carried at appraised value. Deals that land below the threshold aren’t required to get a report, though lenders may still request one depending on the complexity of the business.

What Goes into the Report

The SOP doesn’t leave much room for interpretation on scope. An independent financial professional engaged by the lender, not the borrower or seller, must prepare the report. A sell-side due diligence report passed along through a broker won’t satisfy the requirement, even if the underlying work is sound.

The report must reconcile accountant-prepared financials, tax returns, general ledger data, and IRS transcripts into one normalized earnings figure. Every adjustment along the way, whether it’s a one-time expense, above-market owner pay, a related-party transaction, or deferred maintenance, needs documentation and a clear tie-back to historical net income. Revenue quality gets examined too, including how concentrated the customer base is and whether contracts are likely to survive the ownership change.

Cash gets its own test. Reported receipts and disbursements must reconcile to actual bank statement activity over the trailing twelve months and across the two most recent fiscal years.

How the Report Affects Loan Approval

This isn’t paperwork that gets filed and forgotten. Lenders must use the earnings figure from the report in the debt service coverage calculation, and that figure drives the loan structure. Minimum coverage is 1.25 to 1 for initial acquisitions and owner buyouts, and 1.15 to 1 for business expansions. If the numbers don’t support the proposed loan, the lender has two options: shrink the loan or ask the borrower to bring more equity to the table.

Timing matters here too. Under the Preferred Lender Program, the quality of earnings engagement can be completed after the SBA loan number is issued, but it has to be formally engaged, with a signed letter and a vendor on record, at the moment that number comes through. Waiting until closer to closing to line up a provider isn’t an option anymore.

Working with BPM on Your Next Transaction

Deals at or above the $3 million threshold now move on a different clock, and the businesses that plan for it early tend to have smoother closings. Bringing in a financial due diligence team before the loan number is issued, rather than scrambling once it is, keeps the valuation and the earnings analysis working from the same set of tested numbers instead of two separate stories.

BPM’s Quality of Earnings services work with lenders, buyers, and sellers to build quality of earnings reports that hold up under a credit committee’s review and stand the test of time. If you’re structuring a deal that will fall under the new SOP, contact us to talk through scope and timing before your engagement letter is signed.