SBA Quality of Earnings Reports
Required on 7(a) Change-of-Ownership Loans of $3 Million or More from October 1, 2026
From October 1, 2026, an independent quality of earnings report is mandatory on SBA 7(a) change-of-ownership loans priced at $3 million or more.
For years this analysis sat in the optional column, and lenders leaned on tax transcripts and appraisals instead. Under the SBA’s SOP 50 10 it is now a condition of credit approval on larger acquisitions. We are a Los Angeles CPA firm that already does transaction diligence — dental practice acquisitions, restaurant and food-service groups, and owner-operated businesses across California. This page sets out what the requirement says, who it catches, and when a provider has to be engaged.
Does the new SBA rule apply to my deal?
If it is a 7(a) change-of-ownership loan with a purchase price of $3 million or more, yes.
The requirement reaches initial acquisitions and business expansions at or above the threshold. Owner buyouts and ESOP or cooperative conversions are exempt, on the reasoning that the existing owner stays involved and already knows the business from the inside. Purchase price for this test is the figure stated in the purchase and sale agreement, less any owner-occupied real estate carried at appraised value — so a deal with significant real estate can sit below the line even when the headline number does not. Deals under $3 million are not required to obtain a report, but a lender may still ask for one where the business is complex.
What has to be in the report?
One normalized earnings figure, reconciled from four separate records — with every adjustment documented.
The report must reconcile accountant-prepared financial statements, filed tax returns, general ledger data and IRS transcripts into a single normalized earnings number. Each adjustment along the way needs support and a stated rationale: one-time expenses, above-market owner compensation, related-party transactions, deferred maintenance. Cash receives its own test — reported receipts and disbursements must tie to actual bank statement activity across the trailing twelve months and the two most recent fiscal years. That last requirement is the one that surprises sellers most often, because it compares what the books say to what the bank actually saw.
Who is allowed to prepare it?
An independent financial professional engaged by the lender — not by the borrower and not by the seller.
Independence here is structural, not a matter of tone. A sell-side due diligence report handed over through a broker does not satisfy the requirement even when the underlying work is sound, because the engagement ran the wrong direction. If you are a buyer who has already paid for diligence, that work is still useful to you — it simply is not the report the 7(a) loan program now asks the lender to obtain.
How does the report change loan approval?
The earnings figure feeds the debt service coverage calculation, and that calculation drives the loan structure.
This is not a document that gets filed and forgotten. The lender must use the earnings number from the report in the coverage test. Minimum coverage is 1.25 to 1 for initial acquisitions and owner buyouts, and 1.15 to 1 for business expansions. When normalized earnings land below what the seller’s presentation implied, the consequences are immediate: a lower loan amount, a larger equity injection, a seller note, a repriced deal — or no deal. Knowing that number before the letter of intent hardens is worth considerably more than learning it in underwriting.
When do we need to be engaged?
Under the Preferred Lender Program, the engagement must be signed and the vendor on record at the moment the SBA loan number is issued.
The report itself can be completed after the loan number comes through, but the engagement cannot be arranged after the fact. A signed engagement letter and a named provider have to exist at that moment. In practice this means lining up a provider while the application is still moving rather than once the number lands. Deals at or above the threshold now run on a tighter clock than most buyers expect, and the ones that close smoothly are the ones that brought diligence in before the loan number, not after.