New SBA Requirement May Affect the Timeline and Due Diligence for Certain Business Acquisitions

If you’re planning to buy a business, sell one, or pursue SBA financing as part of a transaction, a new requirement could introduce an additional step to the process.

Under SBA Standard Operating Procedure (SOP) 50 10 8.1, effective October 1, 2026, certain SBA 7(a) change-of-ownership and expansion transactions with a purchase price of $3 million or more will require an independent Quality of Earnings (QofE) analysis. The report must be prepared by an independent financial professional engaged on behalf of the lender and becomes part of the lender’s underwriting process.

For many businesses, this will be the first time a transaction requires a formal QofE analysis in addition to a business valuation. As a result, organizations pursuing qualifying transactions may need to plan for additional financial diligence, documentation requests, and coordination earlier in the deal process.

What Changed Under SBA SOP 50 10 8.1

For qualifying SBA 7(a) acquisition and expansion transactions, the new requirement adds a second layer of financial due diligence. In addition to the business valuation that lenders have long required, certain transactions will now require an independent Quality of Earnings analysis prepared on the lender’s behalf.

The requirement generally applies to initial acquisitions and business expansion transactions with a purchase price of $3 million or more, excluding the value of any owner-occupied real estate included in the transaction. Certain transaction types, including owner buyouts and ESOP transactions, are excluded from the requirement.

While many business owners may be familiar with a valuation, a Quality of Earnings analysis serves a different purpose. A business valuation helps determine what a business may be worth. A Quality of Earnings analysis focuses on the underlying financial performance of the business, examining the sustainability of earnings and evaluating the adjustments often used to present a company’s normalized results.

The SBA’s updated guidance calls for a more detailed review of financial information, including the reconciliation of financial records and an assessment of earnings used in the lender’s underwriting process. As a result, organizations pursuing qualifying transactions should expect additional documentation requests and a more involved diligence process than they may have encountered in prior SBA-financed deals.

How the SBA QofE Requirement Affects Buyers and Sellers

For many organizations, the most immediate impact may not be the requirement itself but how it affects the transaction process. A Quality of Earnings analysis takes time, requires access to detailed financial information, and may raise questions that need to be addressed before financing can move forward.

Organizations pursuing a qualifying transaction should be prepared for a more extensive analysis of their financial records than in the past. The analysis is designed to evaluate the sustainability of earnings and the financial performance underlying the transaction, which means lenders may request additional documentation and clarification as part of their due diligence process.

Timing will also become an important consideration. Buyers, sellers, and their advisors may benefit from discussing the requirement early in the transaction process, particularly as SBA financing accommodations are expected to meet certain thresholds. Proactively assembling accounting records, tax returns, internal financial statements, and other supporting documentation will help reduce the risk of delays later in the financing process.

For sellers, the new requirement reinforces the value of maintaining well-organized financial records and understanding how the company’s earnings are presented. For buyers, it provides an additional layer of financial diligence that may help validate the performance of the business they intend to acquire. In both cases, preparation can contribute to a smoother transaction experience and help surface potential issues before they affect financing or closing timelines.

Why Quality of Earnings Matters in SBA-Financed Transactions

Purchase price, financing, and transaction structure are all influenced by a company’s financial performance. As a result, lenders increasingly want a deeper understanding of the earnings supporting a transaction, particularly when an SBA-backed loan is involved.

A Quality of Earnings analysis focuses on the financial performance behind the numbers. The analysis evaluates whether reported earnings are supported by available records and whether adjustments to earnings are reasonable and well documented. The goal is to provide a clearer picture of the business’s ongoing financial performance and the cash flow available to support debt repayment.

The SBA SOP 50 10 8.1 goes beyond a high-level examination of financial statements. The guidance calls for procedures that include reconciling tax and financial records, reviewing key earnings adjustments, evaluating revenue sources, and analyzing cash activity. The resulting report becomes part of the lender’s underwriting file and is used in evaluating the transaction.

For organizations pursuing an acquisition, preparing for a sale, or seeking SBA financing, the new requirement reflects a growing emphasis on substantiating the financial performance underlying a transaction. Understanding those expectations early can help stakeholders approach the process with greater clarity and fewer surprises.

Putting This Into Practice: QofE Lite

AAFCPAs’ Transaction Advisory practice helps buyers, sellers, and lenders gain a clearer understanding of the financial performance underlying a transaction. As organizations prepare for the requirements introduced under SBA SOP 50 10 8.1, our team can assist with Quality of Earnings analyses designed to evaluate earnings, review key financial adjustments, analyze working capital trends, assess customer concentration, and provide insight into the financial factors that may influence transaction planning and financing discussions. For qualifying SBA 7(a) transactions, our Quality of Earnings Lite (QofE Lite) offering provides a focused and efficient approach to financial diligence that is particularly well suited for lower middle-market, time-sensitive, and budget-conscious transactions, helping stakeholders navigate the process with greater clarity and a stronger understanding of the financial information supporting the deal.

These insights were contributed by Emily Feeley, CPA, CM&AA, MBA, Director, Transaction Advisory.

Questions? Reach out to our author directly or your AAFCPAs partner.

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