If you are planning to buy a business using an SBA 7(a) loan, a major underwriting change coming October 1, 2026 could affect how your acquisition is evaluated.

Under the SBA’s new SOP 50 10 8.1 provisions, certain business acquisitions and expansions at or above a $3 million business purchase price will require an independent Quality of Earnings, or QoE, report as part of the lender’s underwriting process.

For business buyers, this is more than another item on a financing checklist.

A Quality of Earnings analysis can affect how a lender views the company’s cash flow, the debt the business can support, the required debt service coverage ratio, and ultimately how the acquisition needs to be structured.

If you are considering an SBA-financed business acquisition, understanding the new rule early can help you avoid surprises later in the process.

What Is a Quality of Earnings Report?

A Quality of Earnings report is a financial analysis designed to determine whether a company’s reported earnings accurately reflect the cash flow that can reasonably be expected to continue after an acquisition.

It goes beyond simply looking at revenue and net income.

A QoE analysis can examine:

• Historical financial statements
• Business tax returns
• Revenue trends
• Customer concentration
• Recurring versus non-recurring revenue
• Owner compensation
• Personal or discretionary expenses
• Related-party transactions
• One-time expenses
• Proposed add-backs
• Accounts receivable and cash collections
• Bank activity
• Operating cash flow
• The sustainability of earnings following the ownership transition

The objective is to develop a more reliable picture of the company’s normalized and sustainable earnings.

That number can be particularly important when the business is being purchased with debt.

When Will the New SBA QoE Requirement Apply?

Beginning October 1, 2026, qualifying SBA 7(a) transactions involving an initial business acquisition or certain business expansions with a business purchase price of $3 million or more will generally require an independent QoE report.

One important point for buyers is that the threshold is based on the business purchase price, not simply the amount of SBA financing being requested.

For example, suppose a business is being purchased for $3.2 million.

The buyer contributes $500,000 and obtains additional financing through an SBA loan and seller financing.

The fact that the buyer is borrowing less than $3 million does not necessarily take the transaction below the $3 million threshold.

The purchase price itself is what matters.

The calculation also has specific rules concerning items such as buyer equity, seller financing and owner-occupied real estate, so buyers should have their lending team classify the transaction early.

Why Does the SBA Care About Quality of Earnings?

The basic question behind the rule is straightforward:

Does the business actually generate enough sustainable cash flow to support the debt being proposed?

When financing a business acquisition, the lender is not simply evaluating whether the buyer has good credit or whether the company has historically generated a profit.

The lender must determine whether the business’s cash flow can support the proposed debt payments after the acquisition.

This is where the QoE becomes important.

A seller may report strong cash flow based on a number of adjustments and add-backs. A business broker may market the company based on Seller’s Discretionary Earnings. A buyer may have its own assumptions about expenses that will disappear after closing.

The lender, however, has to determine what earnings are actually supportable.

If the QoE analysis produces a lower adjusted earnings figure, that can change the financing equation.

How a QoE Could Affect Your SBA Loan

One of the biggest concerns for business buyers is loan sizing.

Suppose a business is marketed as generating $750,000 in annual cash flow.

The buyer’s initial financing model may assume that the entire amount is available to support debt.

But during the QoE process, the lender may determine that some of the company’s add-backs are not sustainable or cannot be adequately documented.

Perhaps the company has:

• Personal expenses that cannot simply be eliminated
• A customer concentration issue
• Recurring expenses classified as one-time costs
• Owner compensation that will need to continue
• Related-party expenses that are below market
• Revenue that is unusually high compared with historical performance

If those adjustments reduce normalized cash flow, the amount of debt the business can support may also decline.

That could affect:

• Maximum SBA loan amount
• Required buyer equity
• Debt service coverage ratio
• Seller financing
• Purchase price
• Working capital
• Goodwill financing
• Overall transaction structure

This is why buyers should not wait until the final stages of underwriting to discover how the company’s earnings will be viewed.

The Importance of DSCR in an SBA Business Acquisition

Debt service coverage ratio, or DSCR, is one of the key measures lenders use to determine whether a business generates enough cash flow to service its debt.

For applicable SBA 7(a) transactions, the lender’s analysis of adjusted earnings can therefore become extremely important.

If the QoE-adjusted cash flow is lower than the buyer originally anticipated, the proposed financing may no longer work exactly as structured.

That does not necessarily mean the acquisition has to be abandoned.

It may mean the transaction needs to be reworked.

For example, the buyer and lender may consider:

• A lower purchase price
• A larger equity contribution
• Additional seller financing
• A lower SBA loan amount
• Changes to the working capital allocation
• Different financing terms
• A revised transaction structure

The earlier these possibilities are identified, the more options the buyer generally has.

What Will the QoE Look At?

Business buyers should expect a deeper financial review than a basic examination of the company’s profit and loss statement.

1. Financial Statement Consistency

The lender may compare financial statements against tax returns, internal accounting records, bank activity and other available financial information.

Differences do not automatically mean there is a problem, but they will need to be understood and documented.

2. Revenue Quality

Revenue is not necessarily equal to sustainable cash flow.

The analysis may examine:

• Customer concentration
• Recurring revenue
• Contract terms
• Customer retention
• Pricing changes
• Revenue growth
• Large or unusual customer relationships

A business heavily dependent on one customer, for example, may receive additional scrutiny.

3. Expense Normalization

Business owners often have expenses that will change following an acquisition.

Some may be legitimate add-backs.

Others may represent real operating expenses that the new owner will continue to incur.

The distinction matters.

4. Add-Backs

Add-backs can have a significant impact on acquisition financing.

But an add-back isn’t automatically accepted simply because it appears on a seller’s adjusted cash-flow statement.

The lender needs to determine whether the expense is genuinely non-recurring, properly documented and unlikely to continue under new ownership.

5. Related-Party Transactions

Rent, management fees, family payroll, vendor relationships and other related-party arrangements may require additional analysis.

The goal is to determine what the business’s normalized operating costs will look like after the acquisition.

6. Cash Flow and Bank Activity

The analysis can also reconcile reported earnings with actual cash activity.

This is an important distinction.

A business can show strong accounting earnings while having cash-flow characteristics that warrant closer examination.

What Business Buyers Should Do Before October 1

If you are already looking at a business acquisition, the best approach is to start preparing before the lender formally requests the QoE.

1. Determine Whether Your Transaction Is Subject to the Rule

Start by identifying exactly what type of transaction you are pursuing.

Is it:

• An initial business acquisition?
• An expansion through the purchase of another business?
• An owner buyout?
• An ESOP transaction?
• Another type of ownership transfer?

The transaction structure matters.

2. Confirm the Actual Purchase Price

Do not assume the amount you intend to borrow determines whether the QoE requirement applies.

Work with your SBA lender to determine how the purchase price is calculated for purposes of the new requirement.

3. Organize the Financial Records

A buyer should be prepared to provide a comprehensive financial data package.

That may include:

• Business tax returns
• Profit and loss statements
• Balance sheets
• General ledgers
• Bank statements
• Accounts receivable aging
• Accounts payable aging
• Payroll records
• Debt schedules
• Customer information
• Contracts
• Lease agreements
• Details supporting proposed add-backs

The cleaner the financial records, the easier it is to identify and explain potential issues.

4. Document Add-Backs

If the seller has provided an adjusted cash-flow calculation, don’t simply accept the number.

Ask what supports each adjustment.

An undocumented add-back may not ultimately provide the benefit expected in the financing analysis.

5. Model Different Financing Scenarios

Business buyers should consider running multiple scenarios before finalizing the deal.

For example:

Base case: Seller’s stated cash flow

Conservative case: Reduced add-backs and normalized expenses

QoE case: Adjusted earnings based on lender-required analysis

This gives the buyer a better understanding of how much room exists in the transaction.

A Simple Example

Imagine you are purchasing an established business for $3 million.

Your proposed structure includes:

• $400,000 buyer equity
• $200,000 seller financing
• $2.4 million SBA 7(a) financing

The fact that the SBA loan is $2.4 million does not necessarily mean the transaction falls below the $3 million QoE threshold.

If the transaction qualifies under the new requirements, the lender may need an independent QoE as part of the underwriting process.

Now suppose the seller’s financials show $700,000 of adjusted annual cash flow.

After reviewing the company’s financial information, the QoE determines that only $600,000 represents sustainable adjusted earnings.

That $100,000 difference can materially change the lender’s analysis of debt service coverage and the amount of debt the business can support.

The deal may still work.

But the financing structure could need to change.

That is exactly why buyers should understand the rule before negotiating a transaction around a financing assumption that may not ultimately hold.

Don’t Wait Until the Loan Application

The biggest takeaway from the new SBA Quality of Earnings requirement is not simply that another report may be required.

It is that financial diligence is becoming an even more important part of SBA business acquisition financing.

If you are buying a business for $3 million or more, the financial story presented by the seller needs to withstand a much closer examination.

And even transactions that do not require a mandatory QoE can still be subject to detailed lender analysis.

The SBA itself recommends that prospective business buyers conduct thorough due diligence and review financial statements, tax returns, contracts and other transaction documents with qualified professionals.

The best time to discover that the cash flow does not support the proposed financing is before you sign yourself into a transaction structure that depends on it.

How Synergy Commercial Funding Can Help

Buying a business is about more than finding a company and submitting an SBA loan application.

The financing needs to work with the purchase price, cash flow, buyer equity, seller financing and the long-term needs of the business.

At Synergy Commercial Funding, we help business buyers evaluate their financing options and connect the acquisition strategy with the realities of commercial lending.

We can help you think through:

• SBA 7(a) acquisition financing
• Business purchase financing
• Debt service coverage
• Buyer equity requirements
• Seller financing
• Working capital needs
• Financing structure
• Alternative commercial financing options

The earlier we understand the transaction, the more effectively we can help identify potential financing challenges and opportunities.

Planning to Buy a Business?

If you are considering an SBA-financed acquisition, don’t wait until underwriting to find out whether the numbers work.

Talk with Synergy Commercial Funding before you finalize your financing structure.

We can help you understand what lenders are likely to look for, how the new SBA Quality of Earnings requirements may affect your transaction, and what financing options may be available.

The goal isn’t simply to get a loan. It’s to structure financing that gives the acquisition the best chance to succeed.

Disclaimer: This article is for educational purposes only and does not constitute legal, accounting, tax, or lending advice. SBA requirements and individual lender policies can change. Business buyers should confirm the requirements applicable to their specific transaction with their SBA lender and qualified professional advisors.