SBA QoE Requirements: What Is a Quality of Earnings Report and When Is One Required?

When a buyer acquires a business, the purchase price and financing depend heavily on the company’s earnings. A lender needs to understand whether those earnings are supported, recurring, and likely to continue after the sale.

That is the purpose of a quality of earnings report, commonly called a QoE.

Effective October 1, 2026, the U.S. Small Business Administration requires a QoE for certain SBA 7(a) change-of-ownership transactions. The requirement appears in SOP 50 10 8.1 and applies in addition to the business valuation. It is not simply another document for the loan file: the lender must use the earnings determined through the QoE when calculating debt service coverage.

A QoE can affect whether the proposed debt is supportable, how much equity a buyer needs to contribute, and whether the original transaction terms remain workable.

This article explains what a QoE is, when the SBA requires one, and what transaction parties should expect.

What Is a QoE Report?

A quality of earnings report is a financial due diligence analysis that examines the reliability, accuracy, and sustainability of a company’s historical and projected earnings.

The analysis begins with seller-reported earnings. The preparer compares the financial information with supporting evidence and investigates differences that could affect normalized earnings.

Depending on the assignment, the records may include:

• Business tax returns

• IRS tax transcripts

• Accountant-prepared financial statements

• Internal financial statements

• General ledger detail

• Bank statements

• Payroll records

• Customer revenue reports

• Contracts and related-party agreements

• Support for proposed add-backs

A QoE seeks to determine how much of reported earnings reflects normal, recurring operations and whether those earnings are reasonably expected to continue.

For example, a company may report strong earnings because it deferred necessary repairs, received unusual nonrecurring revenue, or paid a working owner substantially less than the market cost of a replacement. Those circumstances do not necessarily mean the financial statements are incorrect. They do mean reported earnings may not represent the economic benefit available to a buyer.

A documented one-time expense that will not continue may support an increase to normalized earnings. Adjustments can move earnings up or down; the purpose is supportability, not a predetermined result.

A QoE Is Not the Same as a Business Valuation

A QoE and a business valuation may analyze some of the same financial records, but they answer different questions.

A QoE asks whether the company’s reported earnings are reliable, recurring, and sustainable. A business valuation asks what the business or ownership interest is worth as of a specified date.

The valuation professional may normalize historical earnings as part of the valuation process. However, the valuation also considers the expected economic benefits of ownership, risk, market evidence, assets, liabilities, and the interest being valued. It then applies appropriate valuation methods to develop a conclusion of value.

The QoE focuses more deeply on the support for revenue, expenses, cash activity, and proposed adjustments. It does not replace the valuation and does not independently establish the purchase price.

The two reports should nevertheless tell a financially consistent story. If a valuation relies on adjusted earnings that are not supported by the QoE, the lender must address the difference. On a qualifying SBA transaction, the QoE earnings are used in the lender’s debt service coverage analysis.

A QoE Is Also Different From an Audit

An audit expresses an opinion about whether the financial statements are presented fairly under the applicable reporting framework. A QoE does not provide an audit opinion. Instead, it concentrates on the components and sustainability of earnings, including cash activity, proposed add-backs, and whether revenue and margins are likely to continue. Audited statements may still contain unusual or owner-specific items that warrant analysis in a transaction.

When Does the SBA Require a QoE?

Under SOP 50 10 8.1, a QoE is required when all three of the following conditions apply:

1. The financing is an SBA 7(a) loan involving a change of ownership.

2. The transaction is classified as an Initial Acquisition or Business Expansion.

3. The Business Purchase Price is $3 million or more.

The requirement applies to applications issued an SBA loan number on or after October 1, 2026. The lender should confirm the applicable SOP and transaction classification because those details determine which requirements apply.

SOP 50 10 8.1 identifies four change-of-ownership categories: Initial Acquisition, Business Expansion, Owner Buyout, and ESOP & Cooperative. The QoE requirement applies to the first two categories at the stated purchase-price threshold. It does not apply to an Owner Buyout or ESOP & Cooperative transaction under this provision.

How Is the $3 Million Threshold Calculated?

The threshold is based on the Business Purchase Price, not the SBA loan amount. Buyer equity and seller financing do not reduce the price used for this test.

Owner-occupied commercial real estate is excluded. When a contract includes the business and real estate, the property’s appraised value is removed from the total contract price.

Consider a transaction with a total contract price of $3.6 million, including an owner-occupied building appraised at $800,000:

$3,600,000 total contract price
Less: $800,000 appraised real estate value
Equals: $2,800,000 Business Purchase Price

The resulting price is below $3 million, so the transaction would not meet the QoE threshold. Other applicable valuation and due diligence requirements would remain.

Now assume a buyer agrees to pay $3.2 million for an operating business with no real estate. The buyer contributes $500,000 and the seller finances $400,000:

Business Purchase Price: $3,200,000

The transaction meets the threshold. The equity contribution and seller note affect the sources of funds, but they do not reduce the Business Purchase Price.

The SOP also provides an exception for the acquisition of an owner-occupied Special Purpose Property. A QoE is not required for that acquisition regardless of the Business Purchase Price, although the business valuation and other applicable requirements remain.

Who Orders and Receives the SBA QoE?

The lender orders the QoE. The report must be prepared by an independent, experienced financial professional and conducted for the benefit of the lender. It may not be prepared by or for the seller.

This requirement matters when a seller already has a sell-side QoE. That report may be useful to prospective buyers, but it does not automatically satisfy the SBA requirement.

A buyer may also commission a QoE during acquisition due diligence. If the buyer already has a report, the lender may have one of its approved vendors review it to help mitigate costs. The lender must include the review findings and original QoE in the loan file. The lender cannot simply rely on a report prepared for another party without the required review.

The SOP does not prescribe one credential, but the professional must be independent and experienced. Lenders may also establish vendor approval standards.

What Must an SBA QoE Include?

The report must reconcile the company’s financial information, develop normalized earnings, document adjustments, test cash activity, and assess the sustainability of revenue.

Reconciliation of Financial Sources

The QoE reconciles accountant-prepared financial statements, business tax returns, internal financial statements, and IRS transcript data. Material differences should be identified and explained.

This process can uncover timing differences, reclassifications, amended returns, incomplete records, or inconsistencies requiring investigation. A difference does not automatically indicate a problem, but it should be explained.

Normalized Earnings

The report must produce a normalized, adjusted earnings figure that reflects recurring, arm’s-length operations.

Reported net income, SDE, or EBITDA should not be accepted without examining the underlying accounts. The preparer evaluates whether proposed adjustments are supported and whether a buyer would incur a replacement cost after the sale.

Potential items include:

• Nonrecurring revenue or expenses

• Personal expenses paid by the business

• Above- or below-market owner compensation

• Compensation paid to family members

• Related-party rent or other related-party transactions

• Deferred maintenance

• Gains or losses on asset sales

• Discontinued operations

• Cash-basis and accrual-basis timing differences

Calling an expense “one time” is not enough. A company may have a different unusual expense every year, or a claimed add-back may relate to work that someone must perform after closing. Each adjustment requires documentation and an economic explanation.

For example, assume the working owner receives a $60,000 salary, but a qualified replacement manager would cost $110,000. If the buyer will not perform the owner’s duties, normalized earnings may require an additional $50,000 management expense:

Reported earnings: $900,000
Less: Compensation normalization: $50,000
Normalized earnings: $850,000

The fact that the current owner chose a lower salary does not eliminate the cost of the role.

Cash Proof

The SBA-required QoE includes a Cash Proof that reconciles bank statement data to the income statement and tax return. The required periods are the trailing 12 months and the last two fiscal years, unless the business has operated for less than two years.

The Cash Proof is intended to identify discrepancies in reported income and undisclosed expenses by examining whether cash activity is consistent with the financial results provided to the lender.

Suppose a business reports $2.4 million of revenue while bank deposits for the same period total $2.1 million. The $300,000 difference does not prove that revenue is overstated. It may result from collection timing, transfers between accounts, deposits to another documented account, loan proceeds, sales tax, or other reconciling items. The difference must be investigated and explained rather than ignored.

A Cash Proof is more than comparing deposits with sales. It distinguishes operating receipts from transfers, financing proceeds, owner contributions, taxes, and other nonrevenue activity while considering receivables and the company’s accounting method.

Revenue Quality and Sustainability

The report assesses whether the historical revenue base and margins are likely to continue after the sale. For the SBA analysis, this includes customer concentration, contract continuity, and the likelihood that revenue and margins will be maintained.

Customer-level revenue reports may show whether sales depend heavily on one customer. Contracts can indicate whether important relationships are transferable or approaching expiration, while historical margins may show whether growth came with lower pricing or rising direct costs. The analysis does not guarantee future results; it identifies evidence supporting or challenging the earnings used in underwriting.

How Does the Lender Use the QoE?

The lender must use the earnings from the QoE in its debt service coverage calculation and retain the report in the credit file.

Under SOP 50 10 8.1, the minimum debt service coverage ratio is 1.25 to 1 for an Initial Acquisition and 1.15 to 1 for a Business Expansion. The calculation uses the last fiscal year-end or an average of the last two fiscal year-end statements, as applicable under the SOP.

If the QoE supports less earnings than originally assumed, the proposed debt may not satisfy the required coverage. The lender must reduce the loan amount when QoE earnings do not support the valuation and debt structure. Additional buyer equity may address the gap.

A material change in normalized earnings can affect financing, valuation assumptions, negotiations, and the economics of the transaction.

When Must the Report Be Completed?

Timing depends on the lender’s processing method.

For Loan Guaranty Processing Center submissions, the valuation and QoE accompany the application. For a Preferred Lenders Program lender, both must be formally engaged by issuance of the SBA loan number and completed before closing.

If due diligence is incomplete when the loan number is issued, the credit memorandum includes an estimated business value. After completion, the lender updates its analysis for the QoE findings and their effect on debt service coverage.

Starting early gives the preparer time to reconcile records and request missing support. Delays often occur when tax transcripts, bank statements, general ledger detail, customer reports, or documentation for add-backs are incomplete.

Preparing for a Quality of Earnings Review

The exact request list depends on the business, but a typical starting package includes:

• Business tax returns for the last two fiscal years

• IRS tax transcripts

• Accountant-prepared financial statements

• Internal year-end and interim financial statements

• Detailed general ledgers

• Bank statements for the last two fiscal years and trailing 12 months

• Payroll records and owner compensation detail

• Documentation for each proposed adjustment

• Customer revenue detail and significant contracts

• Related-party leases and agreements

• Information about unusual or nonrecurring events

The records should cover consistent periods and reconcile wherever possible. Management should explain differences rather than modifying records simply to make totals match. Organizing support early can reduce delays and leave time to evaluate findings before transaction deadlines.

Common QoE Misunderstandings

“A Seller’s QoE Will Meet the SBA Requirement”

Not by itself. The SBA QoE must be conducted for the benefit of the lender and cannot be prepared by or for the seller.

“A Larger Down Payment Avoids the Requirement”

The threshold is based on Business Purchase Price before buyer equity and seller financing. A larger equity contribution may reduce the loan amount, but it does not change whether the purchase price meets the threshold.

“The QoE Replaces the Business Valuation”

It does not. Qualifying transactions require both reports. One analyzes the reliability and sustainability of earnings; the other develops a conclusion of value.

“Every Proposed Add-Back Increases Earnings”

Only supported adjustments should be accepted. The review may also identify expenses that need to be added, revenue that should be removed, or owner compensation that must be normalized downward.

“A QoE Guarantees Future Performance”

No financial due diligence report can guarantee future results. A QoE evaluates historical evidence and the support for continuing earnings, subject to the report’s scope and limitations.

Understand the Earnings Before Relying on Them

A QoE connects transaction earnings with the evidence supporting them. It reconciles financial sources, tests cash activity, documents adjustments, and considers whether revenue and margins are sustainable.

For qualifying SBA 7(a) transactions, that analysis now has a direct underwriting role. The lender must use QoE earnings to determine debt service coverage, and the findings may affect the loan amount and required equity.

BizWorth Professional Services prepares independent quality of earnings reports designed to address the requirements of SBA SOP 50 10 8.1. Our team can also provide the SBA business valuation required for the transaction while maintaining the appropriate scope and independence for each engagement.

If you are financing, acquiring, or advising on a change-of-ownership transaction, determining whether a QoE is required early can help prevent avoidable delays and provide a clearer understanding of the earnings supporting the deal.