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The SBA’s New Quality of Earnings Rule: What Business Buyers and Sellers Need to Know

The SBA’s New Quality of Earnings Rule: What Business Buyers and Sellers Need to Know

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Beginning October 1, 2026, some SBA-financed business acquisitions will require an independent quality of earnings (QoE) analysis.

The rule applies to acquisitions with a business purchase price of $3 million or more (excluding applicable owner-occupied real estate). The QoE will be part of the lender’s underwriting process and will be required in addition to, not instead of, the traditional business valuation. 

For business owners considering a sale and for buyers using SBA financing, the important message is simple: the quality and reliability of a company’s earnings are about to receive much closer scrutiny.

What Is a Quality of Earnings Analysis?

A business valuation and a QoE analysis serve different purposes. A valuation helps determine what a business is worth. A QoE looks more closely at how reliable and sustainable the company’s earnings really are.

That distinction can significantly affect a transaction. For example, a seller may present adjusted earnings that exclude certain owner expenses or unusual costs. Those adjustments may make sense, but a QoE examines whether they are supported.

The analysis may also identify issues that are not obvious from tax returns or financial statements alone. These could include inconsistent margins, dependence on a small number of customers, unusual related-party expenses, working capital needs or liabilities not fully reflected on the balance sheet.

Ultimately, the lender wants greater confidence that the business will continue to generate enough cash to support the acquisition debt after closing.

What Will a QoE Look At?

Although the analysis can be extensive, business owners do not need to become experts in the technical details. At a high level, expect the QoE provider to examine four areas:

  • Reported earnings. Do the company’s financial statements, tax returns, bank activity and other records support the earnings being presented?
  • Adjustments and add-backs. Are owner expenses, one-time costs and other adjustments legitimate and well documented?
  • Revenue and profitability. Are revenues and margins sustainable? Is the company overly dependent on a limited number of customers or vendors?
  • Working capital and liabilities. Does the company have sufficient working capital and are there financial obligations that may not be readily apparent from the balance sheet? 

Buyers should understand these issues regardless of financing. The new SBA requirement simply makes the review more formal for qualifying transactions.

Why Sellers Should Pay Attention Now

If you are considering selling your company in the next few years, this change is another reason to make sure your financial house is in order well before going to market. Clean, consistent financial records can make the sale process easier and help support the value you place on your company.

Start with the basics. Close and reconcile your books every month rather than waiting until year-end. Keep personal expenses separate from business expenses whenever possible. Document legitimate owner add-backs and unusual expenses. Review related-party arrangements, including leases, to make sure they are clearly documented and reasonably reflect market conditions. These are good practices for any company preparing for a sale, but they become particularly important when an outside analyst will be examining the earnings on which the purchase price and financing are based.

Some sellers may also want to consider having their own financial diligence performed before going to market. This will not replace the lender-required QoE, but it may uncover potential issues while there is still time to address them.

What Does the New Rule Mean for Buyers?

For buyers, greater financial scrutiny can build confidence in exactly what they are purchasing.

A company may look highly profitable on paper, but the important question is how much of those earnings are likely to continue after ownership changes. A QoE can help identify whether earnings depend on unusually low owner compensation, favorable related-party arrangements, aggressive adjustments or other circumstances that may change after closing. That information could affect the transaction itself. If normalized earnings are materially different from the figures originally presented, they could influence the purchase price, financing structure or amount of working capital needed after closing. 

Buyers should remember, however, that the SBA-required QoE is commissioned for the lender, not the buyer. Buyers who want a deeper analysis addressing their own concerns may still benefit from conducting separate financial due diligence.

Could a QoE Delay a Deal?

Potentially, particularly as lenders, buyers, sellers and QoE providers adjust to the new requirement, a QoE could delay a transaction. For that reason, buyers should discuss the QoE requirement with their lenders early in the acquisition process rather than waiting until underwriting is well underway. The lender controls the required engagement, so understanding when the report will be ordered can help prevent it from becoming a last-minute obstacle to closing. 

Better Financial Information Can Mean a Better Transaction

The new SBA requirement adds another step to qualifying business acquisitions, but it also reinforces something that buyers and sellers should already recognize: good financial information matters. For sellers, clean books and well-supported earnings can make defending the business’ value easier and lessen surprises in the move through due diligence. For buyers, a clearer understanding of recurring earnings can reduce uncertainty and provide a better picture of the business they are acquiring.

Starting on October 1, 2026, for anyone contemplating an SBA-financed transaction of $3 million or more, the time to think about quality of earnings is not when the lender requests the report. It is well before the deal reaches underwriting. 

Contributors

Richard Frizzell, Partner, Frazier & Deeter Advisory, LLC

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