By Zach Davis, Senior Manager - Transaction Advisory Services
If you’re buying a business for $3 million or more with an SBA 7(a) loan, your lender needs a Quality of Earnings (QofE) report. The report is an independent, in-depth check of whether the company’s reported earnings hold up. When SBA first published the rule in August, the report had to be ordered on the lender’s behalf, after the loan process was underway. A buyer who had already done this analysis could end up paying for it twice.
That changed before the rule took effect on October 1. Under a September 25 update to the SBA’s lending rules (SOP 50 10 8.1), a QofE the buyer commissions during its own due diligence can now count, as long as the lender has it reviewed by one of the lender’s approved firms. Reports prepared by or for the seller still don’t qualify.
This update gives buyers a head start, because you can begin QofE work during your own diligence instead of waiting on the lender. But a buyer’s report now has to stand up to an independent review, so the work needs to be scoped to the SBA’s requirements from day one.
What It Means for You
Buyers: Start earlier, but build the report right. A firm the lender chooses will review your report, so it needs to cover everything the SBA requires. A report that cuts corners may have to be redone, which costs time and money. Ask your lender early which review firms it uses and who pays for the review. What you spend on the QofE can also count towards your equity injection.
Lenders: Expect buyer reports to vary in quality. Decide now which firms will review them, what a review covers, how long it takes, and who pays for it.
Sellers: A seller-side QofE is still smart preparation, because it surfaces issues before a buyer finds them. It can’t take the place of the report the SBA requires, however.
Other Changes Worth Knowing
- More deals covered. A buyer who hasn’t worked in the business for at least the past 24 months is now treated as a new owner when acquiring 50% or more of the business or becoming the largest owner. That means the QofE requirement applies.
- Some real estate–heavy deals are exempt. Buying a business together with the special purpose property it operates from, such as a hotel or a storage facility, no longer requires a QofE. A business valuation is still required.
- Newer businesses. For a business open less than two years, the QofE can cover a shorter period.
- Smaller loans can now fund acquisitions. SBA Express and 7(a) Small loans can now be used to buy a business.
- The $3 million threshold and the required content of the report have not changed.
How Hood & Strong Can Help
Hood & Strong's Transaction Advisory Services team performs Quality of Earnings work for every side of an SBA-financed acquisition:
- Buyer-side QofE. Built from the outset to address the full SOP 50 10 8.1 scope, so that it is ready for a lender's vendor review.
- Lender-engaged QofE. Conducted for the benefit of the lender, as the SOP requires, on a fixed fee and in as few as 10 business days once complete documents are received.
- QofE review. Independent reviews for lenders of reports prepared by other firms.
Hood & Strong never reviews a report we prepared, and we assess independence and conflicts on every engagement.
Contact
To discuss how this update affects your SBA transaction, contact:
Zach Davis, Transaction Advisory Senior Manager: ZDavis@hoodstrong.com, 415.869.5809
Jerry Zhou, CPA, Partner-in-Charge, Transaction Advisory Services: JZhou@hoodstrong.com, 415.856.3229
This article summarizes SOP 50 10 8.1 with Technical Policy Updates (published September 25, 2026; effective October 1, 2026) and SBA Information Notice 5000-882227, available at sba.gov. It is general information, not legal, accounting or lending advice. Confirm how it applies to a specific transaction against the SOP text and your lender's policies.
