Written by Andrew Rice, CPA, CVA and Doug Marcincin, CPA
If you're buying a business using Small Business Administration (SBA) financing, there's a good chance you've recently heard about SBA's new Quality of Earnings ("QoE") requirement.
Beginning October 1, 2026, certain SBA-financed business acquisitions of $3 million or more will require an independent Quality of Earnings report as part of the lender's underwriting process. The change is included in SBA SOP 50 10 8.1, which becomes effective October 1, 2026.
At first glance, it may feel like one more expense, one more report, and one more item standing between you and the closing table. I would encourage buyers to look at it differently.
In our experience, the biggest risk in many acquisitions isn't the bank, the lawyer, or even the negotiation. It's not knowing exactly what you're buying.
The bigger takeaway: A Quality of Earnings analysis can provide something far more valuable than compliance with a lender requirement: a clearer understanding of the business you are about to acquire, the earnings it actually generates, and the financial risks that may affect the value of the deal.
The SBA is ultimately backing loans that are frequently supported by a company's future cash flow, not just assets that can be pledged as collateral. The surprising part is not that the SBA is now requiring additional earnings analysis on certain transactions. It is how many buyers were previously willing to complete acquisitions without one.
The SBA 7(a) loan program can be used for complete or partial changes of ownership, which makes SBA financing an important source of capital for many business acquisitions.
If you're investing several million dollars into a business and taking on personal guarantees in the process, a deeper analysis of earnings should not be viewed as optional. It should be viewed as part of making an informed investment decision.
The SBA requirement did not create that need. It simply formalized it.
A Quality of Earnings report is a financial due diligence analysis designed to help a buyer understand the sustainability and reliability of a company's reported earnings. It goes beyond whether the financial statements add up and looks at what is actually driving the business's earnings.
As part of broader financial due diligence, a QoE can help buyers understand the story behind a company’s earnings and identify factors that may affect the transaction.
Depending on the transaction, a QoE may examine revenue and margin trends, nonrecurring expenses, owner-related adjustments, working capital needs, customer concentration, and other items that may affect normalized EBITDA and future cash flow.
The goal is not simply to confirm the seller's numbers. The goal is to understand what those numbers mean after the transaction closes.
That's not a criticism. It's just reality.
There is a consistent profile across many lower-middle-market businesses:
Internal financial statements prepared using some combination of cash-basis accounting, accrual-basis accounting, and everything in between.
Owners who have historically focused on tax minimization, with personal expenses flowing through the business or revenues and expenses shifting between periods.
QuickBooks reports that are only as accurate as the information entered.
Many are excellent businesses. Many are highly profitable. But that does not necessarily mean the EBITDA presented in a Confidential Information Memorandum (CIM) or business broker package will be the same EBITDA a buyer validates through financial due diligence.
Common findings may include:
None of those issues necessarily kills a deal on its own, but they can create a significant headache when discovered after the acquisition closes.
One of the biggest misconceptions about Quality of Earnings work is that the goal is to tear apart the seller's numbers. That's not the objective.
The objective is to understand what you're buying. Sometimes the conclusion is that the business is exactly as represented. That's a great outcome.
In fact, many of the best QoE engagements end with increased confidence, not reduced confidence.
A buyer should walk away understanding:
How earnings were calculated
Which EBITDA adjustments are reasonable and supportable
Areas of potential financial risk
Expected working capital needs
Trends that may not be obvious from annual financial statements
How the company's historical performance may translate after closing
That's valuable information whether you're borrowing money from a bank, using SBA financing, or writing a check entirely with your own capital.
Assume a buyer is acquiring a business for 5x EBITDA.
If earnings are overstated by only $200,000, the implied valuation impact is approximately $1 million.
That's before considering:
A Quality of Earnings analysis will not eliminate all risk, but it can dramatically reduce the chances of being surprised by issues that could have been identified before closing.
As this new SBA requirement takes effect, buyers are likely to see a growing number of accounting and advisory firms marketing QoE services.
Not all providers are the same.
Buyers should work with advisors who regularly perform transaction-related financial due diligence and understand how findings affect valuation, debt capacity, working capital targets, and purchase agreement negotiations.
The goal is not simply to generate a report that satisfies a lender. The goal is to help buyers make better acquisition decisions. Trout CPA’s Transaction Advisory team helps buyers understand how QoE findings may affect valuation, working capital, and other key deal considerations.
The SBA will soon require a Quality of Earnings report for certain transactions. The more important takeaway is this:
If you're about to make one of the largest investments of your life, borrow millions of dollars, and personally guarantee the debt, you should want to know exactly how the business generates its earnings.
The SBA requirement did not create that need. It simply formalized it.
Contact a QoE advisor at Trout CPA to discuss your transaction and financial due diligence needs.
A Quality of Earnings report is a financial due diligence analysis that helps a buyer evaluate the sustainability and reliability of a company’s reported earnings. It may review revenue and margin trends, nonrecurring expenses, owner-related adjustments, working capital needs, and other items that affect normalized EBITDA and future cash flow.
A Quality of Earnings analysis may include a review of revenue trends, gross margins, EBITDA adjustments, owner compensation, nonrecurring expenses, working capital requirements, customer concentration, and other financial factors that could affect the value or risk of a transaction.
An audit and a Quality of Earnings report serve different purposes. An audit provides assurance on whether financial statements are presented in accordance with the applicable accounting framework, while a QoE focuses on the underlying drivers and sustainability of earnings in the context of a transaction.
A QoE can help a buyer better understand normalized earnings, working capital requirements, financial trends, and potential risks before closing. The findings may also influence valuation, purchase price, financing, and other deal terms.
No. A Quality of Earnings report is not required for every acquisition. However, even when a lender or the SBA does not require one, a QoE can provide valuable financial due diligence and help buyers make a more informed acquisition decision.