A significant change to SBA 7(a) lending took effect on October 1, 2026. If you are buying or selling a business with a purchase price of $3 million or more, here is the new mandatory step that every party needs to understand.
A significant change to SBA 7(a) lending took effect on October 1, 2026. If you are buying or selling a business with a purchase price of $3 million or more and the deal involves SBA financing, there is a new mandatory step in the process that every party needs to understand before going to market or submitting a loan application.
As of October 1, 2026, the SBA now requires an independent Quality of Earnings (QoE) report for any 7(a) change-of-ownership loan involving an initial acquisition or business expansion with a purchase price of $3 million or more. This requirement is formalized in the updated SBA Standard Operating Procedure 50 10 8.1.
A QoE report was considered best practice but not mandatory. Lenders could close deals without one. That gap has now been closed for transactions at or above the $3 million threshold.
A QoE report is a financial due diligence document that answers one fundamental question: is the earnings figure the seller is presenting real, repeatable, and supportable at the line-item level?
It is not an audit and it is not a business valuation. An audit evaluates whether financial statements are fairly presented under accounting standards. A valuation uses an earnings figure to conclude on price. A QoE report tests the earnings figure itself, tracing every add-back and adjustment back to actual invoices, contracts, payroll records, and bank statements.
For SBA purposes, the report must reconcile accountant-prepared financial statements, tax returns, internal financials, and IRS transcript data into a single normalized earnings figure. Every add-back must be documented and evaluated, including non-recurring items, owner compensation adjustments, related-party transactions, deferred maintenance, and cash-versus-accrual differences. The report must also assess revenue quality, including customer concentration and the likelihood that margins hold after the ownership change.
Cash proof is mandatory. Reported cash receipts and disbursements must reconcile to bank statement data on a trailing 12-month basis and across the two most recent fiscal years.
$3 Million
Purchase Threshold
1.25 to 1
Min DSC – Acquisition
1.15 to 1
Min DSC – Expansion
Oct 1, 2026
Effective Date
The QoE report must be prepared by an independent financial professional engaged by and acting on behalf of the lender. A seller-side report provided through a broker does not satisfy the requirement. The report cannot be prepared for or by the borrower.
The cost can be charged to the borrower, financed with loan proceeds, or counted toward the required equity injection. For transactions at or above $3 million, this is no longer an optional line item. It is a gating requirement that determines the earnings figure behind the entire deal.
The lender must use the pro forma adjusted earnings figure from the QoE report in the debt service coverage (DSC) calculation. If the adjusted earnings are lower than what the seller represented, the supportable loan amount drops accordingly. The minimum DSC is 1.25 to 1 for initial acquisitions and 1.15 to 1 for business expansions.
Consider what this means in practice. On a $4 million transaction at a 4.0 earnings multiple, a $200,000 overstatement in earnings inflates the supportable purchase price by roughly $800,000. That same $200,000 flows directly into the DSC calculation. The QoE report exists to catch that kind of discrepancy before the loan is made, not after.
On a $4 million deal at a 4.0 multiple, a $200,000 overstatement in earnings inflates the supportable purchase price by roughly $800,000. The QoE report is designed to surface that kind of discrepancy before the loan is funded, not after.
Owner buyouts and ESOP or cooperative conversions are exempt from the QoE requirement. The rationale is that the existing owner retains operational knowledge after closing in those structures, which reduces the information asymmetry that the QoE requirement is designed to address.
If you are selling a business at or above $3 million and your buyer is using SBA financing, your financial records are going to be scrutinized at a level they may not have been in prior deals. Every add-back you have been claiming on your SDE calculation will be traced back to documentation. Inconsistencies between your tax returns, your P&L, and your bank statements will be found.
This is not a reason to panic if your books are clean. It is a reason to get your financials in order before going to market rather than after a buyer is already in due diligence. Sellers with organized, verifiable financials will move through this process cleanly. Sellers with loose bookkeeping or aggressive add-backs will face challenges.
The QoE requirement actually protects you as a buyer. It means the earnings figure you are basing your purchase price and your debt service on has been independently verified before you close. In deals without this requirement, buyers have historically relied on seller-provided financials that may not have been scrutinized at this level.
Plan for the QoE engagement to be initiated at the time your SBA loan number is issued, with the engagement letter signed at that stage. Both the QoE report and the business valuation must be completed before the credit memo is finalized.
This rule reflects a simple reality: in a business acquisition, every number in the deal, the multiple, the concluded value, the coverage ratio, and the loan amount, traces back to one earnings figure. The SBA's position is that for deals at this size, that figure needs to be independently verified. That is a reasonable position, and it is one that buyers and sellers in the NC market need to plan for going forward.
At Jon Tennant Real Estate and Business Brokerage, operating under Midtown Mergers and Acquisitions, we stay current on the regulatory changes affecting business transactions in North Carolina. Reach out if you are planning a business sale or acquisition and want to understand how these requirements apply to your deal.
Business Buying / SBA Financing
Business Buying / Due Diligence
Business Buying