Quality of Earnings Reports: What SBA Lenders Need to Know Under SOP 50 10 8.1

Key Takeaways

• New QoE requirement: Beginning October 1, 2026, certain SBA 7(a) change-of-ownership transactions will require a Quality of Earnings report.
• $3 million threshold: The requirement applies to Business Expansion and Initial Acquisition transactions with a Business Purchase Price of $3 million or greater.
• Valuation is still required: The QoE is required in addition to, not in place of, the required business valuation.
• Cash Proof is required: The QoE must include a Cash Proof covering the trailing 12 months and the last two fiscal years.
• QoE impacts underwriting: Lenders must use the earnings determined through the QoE when calculating Debt Service Coverage.

With the release of SBA SOP 50 10 8.1, effective October 1, 2026, Quality of Earnings reports, commonly referred to as QoE reports, are becoming an important part of the financial due diligence process for certain SBA 7(a) change-of-ownership transactions.

Under the new SOP, lenders must obtain a Quality of Earnings report in addition to the required business valuation for Business Expansion and Initial Acquisition transactions when the Business Purchase Price is $3 million or greater.

For many SBA lenders, this introduces a new step into the acquisition financing process. So, what exactly is a Quality of Earnings report, what does SBA require it to include, and how does it work alongside a business valuation?

What Is a Quality of Earnings Report?

A Quality of Earnings report is a financial due diligence analysis designed to evaluate the reliability, sustainability, and accuracy of a company’s historical and projected earnings.

While financial statements and tax returns show what a business has reported, a QoE goes further by examining the financial information underlying those results. The objective is to develop a clearer picture of the company’s recurring earnings and determine whether the historical financial performance being relied upon in the transaction is supported by the underlying data.

Under SOP 50 10 8.1, the QoE must reconcile the business’s accountant-prepared financial statements, tax returns, internal financial statements, and IRS transcript data to produce a normalized, adjusted earnings figure that reflects recurring, arm’s-length operations.

For an SBA lender, this additional analysis provides greater visibility into the earnings that will ultimately be relied upon to support the acquisition debt.

Why Is SBA Requiring a QoE?

A business acquisition often depends heavily on the historical cash flow of the company being purchased. That cash flow helps support the purchase price, business valuation, proposed debt structure, and ultimately the borrower’s ability to repay the SBA loan.

A QoE provides an additional level of financial due diligence by examining whether reported earnings accurately represent the ongoing economic performance of the business.

SOP 50 10 8.1 requires the QoE to identify and document adjustments to the seller’s reported earnings, including items such as:

• Non-recurring revenue or expenses;
• Above-market or below-market owner compensation;
• Related-party transactions;
• Deferred maintenance; and
• Differences between cash-basis and accrual-basis accounting.

The report must also assess the quality and sustainability of the company’s revenue base, including customer concentration risk, contract continuity, and the likelihood that existing revenue and margins will be maintained following the sale.

In practical terms, the QoE helps the lender answer an important question: How much of the business’s reported earnings appears recurring and sustainable after the transaction closes?

When Is a QoE Required Under SOP 50 10 8.1?

Under SOP 50 10 8.1, a QoE is required for Business Expansion and Initial Acquisition transactions where the Business Purchase Price is $3 million or greater.

Importantly, the $3 million threshold is determined before the application of buyer equity, seller debt, or other financing sources.

This distinction matters for SBA lenders. Structuring a transaction with additional buyer equity or seller financing does not reduce the Business Purchase Price used to determine whether the QoE requirement applies.

Owner Buyout and ESOP & Cooperative transactions are not subject to the QoE requirement.

What Does SBA Require the QoE to Include?

SOP 50 10 8.1 establishes specific requirements for the Quality of Earnings analysis.

The QoE must be performed by an independent, experienced financial professional for the benefit of the lender and may not be prepared by or for the borrower or seller.

The analysis must reconcile the business’s:

• Accountant-prepared financial statements;
• Tax returns;
• Internal financial statements; and
• IRS transcript data.

The objective of this reconciliation is to develop normalized, adjusted earnings that reflect recurring, arm’s-length business operations.

The QoE must also identify and document relevant add-backs and adjustments to the seller’s reported earnings and evaluate the sustainability of the company’s revenue base.

In addition, SBA requires the QoE to include another important component: Cash Proof.

What Is a Cash Proof?

The Cash Proof is a required component of the QoE under SOP 50 10 8.1.

A Cash Proof reconstructs the company’s cash receipts and disbursements by reconciling bank statement data to the income statement and tax return for each period under review.

The analysis is designed to help identify discrepancies in reported income and undisclosed expenses.

SBA requires the Cash Proof to be performed for:

• The trailing 12-month period; and
• The last two fiscal years.

For SBA lenders accustomed to reviewing tax returns and financial statements during underwriting, the Cash Proof adds another level of verification by comparing reported financial performance with the underlying movement of cash.

How Is a Quality of Earnings Report Different From a Business Valuation?

This is an important distinction because SOP 50 10 8.1 requires both reports for transactions subject to the new QoE requirement.

A business valuation primarily answers:

What is the business worth?

The valuation professional analyzes the company and applies appropriate valuation methodologies to develop a conclusion of value that supports the Business Purchase Price.

A Quality of Earnings report addresses a different question:

How reliable and sustainable are the earnings supporting the transaction?

The QoE examines the financial information underlying the company’s reported performance and develops normalized earnings based on its findings.

The two analyses therefore serve different but complementary purposes. The valuation addresses value, while the QoE provides deeper financial due diligence regarding the earnings and cash flow supporting that value and the proposed debt structure.

Why Does the QoE Matter to Debt Service Coverage?

The QoE is more than an additional report for the lender’s credit file.

Under SOP 50 10 8.1, the lender must use the earnings determined through the QoE when calculating Debt Service Coverage (DSC).

If the resulting DSC does not support the business valuation and proposed debt structure, the loan amount must be reduced accordingly. Additional equity may be used to address the difference.

For example, a business may initially appear to generate sufficient earnings to support the proposed acquisition debt. If the QoE identifies non-recurring income, unsupported add-backs, or other adjustments that reduce normalized earnings, those findings must be reflected in the lender’s DSC analysis.

As a result, the QoE can have a direct impact on the amount of debt the transaction can support and the ultimate structure of the acquisition.

Who Can Perform a Quality of Earnings Report?

SOP 50 10 8.1 requires the QoE to be performed by an independent, experienced financial professional and conducted for the benefit of the lender.

The report may not be prepared by or for the borrower or seller. This means lenders should ensure that the QoE engagement is appropriately structured for SBA purposes rather than relying on a report previously commissioned for another party to the transaction.

It is also important to distinguish the QoE provider requirements from SBA’s requirements for a Qualified Source performing the business valuation. While the SOP identifies specific recognized credentials for business valuation professionals, the QoE requirement instead specifies an independent, experienced financial professional.

When Should SBA Lenders Engage a QoE Provider?

For PLP lenders, identifying the QoE requirement early in the transaction will be particularly important.

Under SOP 50 10 8.1, if the application is being processed under PLP authority, the business valuation and any applicable QoE must be formally engaged at the time the SBA Loan Number is issued. A vendor must have been retained and an engagement letter must be in place, even if the financial due diligence has not yet been completed.

If the financial due diligence is still outstanding, the lender’s credit memorandum must initially include an estimate of the business value. Once the valuation and QoE are completed, the credit memorandum must be updated to address the findings, including any impact on Debt Service Coverage, Purchase Price, or equity structure.

For lenders, the practical takeaway is simple: determine whether the QoE requirement applies early in the underwriting process and engage the appropriate provider accordingly.

How BGH Valuation Services Supports SBA Lenders

For lenders preparing for the new requirements, the practical advantage is doing both reports through one engagement. BGH Valuation Services prepares the SBA business valuation and the QoE together: one point of contact, one consolidated data request to the borrower, and the same normalized earnings carried through both reports, with no reconciliation gaps between two firms. Our team holds CVA, CPA, CFA, and CMEA credentials with prior audit experience, every report receives a concurring review by a second credentialed professional, and fees are fixed, never contingent. For PLP lenders, we can put an engagement letter in place quickly so the file is compliant on the day the SBA Loan Number is issued. 

As October 1, 2026 approaches, the lenders who identify qualifying transactions early will have the smoothest closings. If you have a deal in the pipeline or are updating credit policy, contact our team or visit our Quality of Earnings service page to get started.

Frequently Asked Questions

1. When is a Quality of Earnings report required for an SBA transaction?

Under SOP 50 10 8.1, a QoE is required for Business Expansion and Initial Acquisition transactions with a Business Purchase Price of $3 million or greater. The threshold is determined before applying buyer equity, seller debt, or other financing sources.

2. Does a QoE replace the required business valuation?

No. For qualifying transactions, the QoE is required in addition to the business valuation. The valuation addresses the value of the business, while the QoE evaluates the reliability and sustainability of the earnings supporting the transaction.

3. Who can perform the QoE?

The QoE must be performed by an independent, experienced financial professional for the benefit of the lender and may not be prepared by or for the borrower or seller.

What is a Cash Proof?

A financial analysis that reconstructs cash receipts and disbursements by reconciling bank statement data to the income statement and tax returns. Under SOP 50 10 8.1 it must cover the trailing 12-month period and the last two fiscal years. 

Can the lender rely on the buyer’s existing QoE? 

Sometimes. SBA training on 8.1 indicates a buyer’s QoE plus a reliance letter may be furnished to the lender, with the lender engaging its own QoE professional to review the work and determine whether it can be relied upon. 

Who pays for the QoE? 

Out-of-pocket costs for financial due diligence reports may be passed on to the borrower, and amounts the applicant spends on them can count toward the equity injection.