Quality of Earnings for a $3 Million SBA Loan (SOP 50 10 8.1)

Short answer: if you are buying a business with an SBA 7(a) loan and the business purchase price is $3 million or more, yes. Under SBA SOP 50 10 8.1, effective October 1, 2026, the lender must obtain a Quality of Earnings (QoE) report in addition to the business valuation. The test is the purchase price, not the size of the loan.

What changed on October 1, 2026

SBA Standard Operating Procedure 50 10 8.1 sets out the rules for 7(a) changes of ownership in Appendix 15. It now makes a Quality of Earnings report a required part of the lender's financial due diligence on larger acquisitions, and it requires the lender to use the QoE's earnings when deciding how much debt the business can carry.

The $3 million test is the purchase price, not the loan

The SOP applies the threshold to the Business Purchase Price: the price in the purchase and sale agreement, less the appraised value of any owner-occupied commercial real estate being acquired. The $3 million figure is measured before buyer equity, seller debt or any other financing is applied, so restructuring the deal does not move a transaction under the line.

In practice, a $3 million SBA loan used to buy a business will almost always sit on a purchase price above $3 million, because the buyer must also inject equity. But a $2.5 million loan on a $3.2 million purchase is covered too.

Which deals need a QoE

Covered: Initial Acquisitions (a new majority or largest owner) and Business Expansions (an operating business buying another) with a Business Purchase Price of $3 million or more.
Not covered: Owner Buyouts, ESOP and cooperative transactions, and the acquisition of an owner-occupied special purpose property such as a hotel or storage facility, whatever the price.

Below $3 million, the SBA does not require a QoE, though a lender may still ask for one under its own credit policy.

What the QoE must include

Reconciled earnings. The report must reconcile the accountant-prepared financial statements, tax returns, internal financial statements and IRS transcript data into one normalized, adjusted earnings figure that reflects recurring, arm's-length operations.
A Cash Proof. Bank statement activity must be rebuilt and reconciled to the income statement and tax return for the trailing 12 months and each of the last two fiscal years. If the business has operated for less than two years, the scope can be reduced.
Documented add-backs. Every adjustment must be identified and supported, including non-recurring revenue or expenses, above- or below-market owner compensation, related-party transactions, deferred maintenance, and differences between cash and accrual reporting.
Revenue quality. The report must assess customer concentration, contract continuity and how likely revenue and margins are to hold after the sale.

Who can prepare it

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

Buyers who commission their own QoE before approaching a lender are not wasting their money. The SOP allows the lender to have that report reviewed by one of its approved vendors, and the review's findings go into the loan file with the original report. What the lender cannot do is rely on another party's QoE without that vendor review.

How the QoE can change your loan

The lender must use the QoE's earnings to calculate debt service coverage (DSC), measured on the last fiscal year or an average of the last two. The minimums under SOP 50 10 8.1 are 1.25 to 1 for an Initial Acquisition and 1.15 to 1 for a Business Expansion. If coverage on the QoE's numbers does not support the valuation and the proposed debt, the loan amount must be reduced, and additional equity can make up the difference.

An illustration

A buyer agrees to pay $3.4 million for a services company with no real estate. Total project costs are $3.5 million, so the required 10% equity injection is $350,000 and the loan request is $3.15 million. Assume annual debt service on that loan of $480,000. Rates and terms vary, so treat this figure as illustrative.

The seller's presentation shows $640,000 of cash flow available for debt service, which is coverage of 1.33. The QoE then finds $70,000 of one-time revenue and owner pay that is $50,000 below market. Adjusted cash flow falls to $520,000 and coverage falls to 1.08, below the 1.25 minimum.

At 1.25, $520,000 supports about $416,000 of annual debt service, roughly 87% of the original request, or a loan of about $2.73 million on the same terms. The buyer now has a gap of about $420,000 to cover with more equity, standby seller financing, or a lower price.

Equity and seller notes

For an Initial Acquisition, the minimum equity injection is 10% of total project costs, and the SOP says it cannot be reduced or eliminated.
Seller debt that is subordinated to the lender and on full standby, with no payments of principal or interest for the term of the 7(a) loan, can count as equity. Together with other limited sources, it can provide no more than half of the required injection.
When the price is higher than the value supported by the valuation and the QoE, additional funds from limited sources can bridge the difference, but they must be on full standby.

How buyers can prepare

Ask your lender early how it handles the QoE, which vendors it approves, and whether it will review a report you commission yourself.
Request three years of financial statements and tax returns, current interim statements, and bank statements for the trailing 12 months and the last two fiscal years.
Ask for support behind every add-back in the seller's numbers before you agree on price.
Get customer, contract and payroll detail early. Concentration and owner compensation are where adjusted earnings most often move.
Build time for the QoE into your letter of intent and closing timeline.

How sellers can prepare

A seller's own QoE cannot satisfy the SBA requirement, but the work still pays off. Clean monthly closes, reconciled bank accounts, tax returns that tie to the financial statements, and well-documented add-backs make the buyer's QoE faster and reduce the chance that the price is renegotiated late in the process.

Frequently asked questions

Is a Quality of Earnings report the same as a business valuation?

No. The SBA requires both for covered deals. The valuation estimates what the business is worth. The Quality of Earnings report tests whether the earnings behind that value are real, recurring and supported by cash.

Does the $3 million test use the loan amount or the purchase price?

The purchase price. SOP 50 10 8.1 measures the Business Purchase Price before buyer equity, seller debt or other financing, and excludes owner-occupied real estate at its appraised value.

Can the seller's Quality of Earnings report be used?

No. The SOP says the report must not be prepared by or for the seller. A buyer's own report can be used only after the lender has one of its approved vendors review it.

Do owner buyouts need a Quality of Earnings report?

No. Owner Buyout and ESOP and cooperative transactions are not subject to the requirement, and neither is the acquisition of an owner-occupied special purpose property.

Sources

This article summarizes SBA SOP 50 10 8.1 as of its October 1, 2026 effective date. It is general information, not legal, tax or lending advice. Lenders may apply additional requirements under their own credit policies.

Do You Need a Quality of Earnings Report for a $3 Million SBA Loan?