SBA Quality of Earnings Requirement: What Lenders Need to Know About SOP 50 10 8.1
Darren Mize, ASA, Partner, August 21, 2026
Effective October 1, 2026, SBA SOP 50 10 8.1 introduces a separate Quality of Earnings (QoE) requirement for certain 7(a) change-of-ownership transactions. Initial Acquisitions and Business Expansions with a business purchase price of $3 million or more, excluding owner-occupied real estate, will require an independent Quality of Earnings report in addition to the required business valuation. Owner Buyouts and ESOP/Cooperative transactions are excluded from the QoE requirement.
For SBA lenders, this represents an important change in the financial due diligence supporting larger business acquisition loans.
Just as important, the SOP establishes specific requirements surrounding who the QoE is prepared for, what the analysis must include, and how the resulting earnings are used in underwriting.
What Is a Quality of Earnings Report?
A Quality of Earnings, or QoE, report is a financial due diligence analysis designed to validate the reliability and sustainability of a company’s reported earnings.
Unlike a business valuation, which determines the value of the business, a QoE focuses on the financial performance underlying the transaction, which then becomes the basis for cash flow that the business valuation relies upon.
The analysis helps answer a more fundamental question: Does the historical financial information support the earnings and cash flow being relied upon to underwrite a transaction?
For SBA lenders, that distinction is particularly important. Cash flow supports debt service, influences valuation, and ultimately affects the structure and viability of the transaction.
Who Must Order the SBA Quality of Earnings Report?
One of the most important requirements for lenders, buyers, and advisors to understand is that the SBA-required Quality of Earnings report must be conducted for the benefit of the lender.
The report may not be prepared by or for the borrower or seller.
That means a Quality of Earnings report previously commissioned by a buyer or seller may still provide useful transaction diligence, but it does not replace the lender-focused QoE required under SOP 50 10 8.1.
For lenders, this makes provider selection and engagement timing especially important. The QoE is not simply another document supplied by the borrower. It becomes part of the lender’s independent financial due diligence supporting the credit decision.
What is the SBA’s Required Scope for a Quality of Earnings Report?
Based on GCF’s initial review of the new SOP requirement, we believe an SBA-focused Quality of Earnings report appears to center on four core areas.
1. Financial Reporting & Reconciliation
The first step is determining whether the various sources of financial information tell a consistent story. This includes comparing tax returns, financial statements, internal financial reporting, and IRS transcript data. The objective is to identify material inconsistencies and establish a reliable financial foundation for further analysis.
2. Cash Proof
SOP 50 10 8.1 specifically requires a Cash Proof as part of the Quality of Earnings analysis.
The Cash Proof reconstructs cash receipts and disbursements and reconciles bank statement activity to the income statement and tax returns for the periods under review. The analysis is performed on both a trailing twelve-month basis and for the prior two fiscal years.
For lenders, this provides a source-based test of whether reported financial performance is supported by the actual cash activity of the business.
Rather than relying solely on reported revenue or internally prepared financial statements, the Cash Proof helps identify inconsistencies between what the company reports and what moved through its bank accounts.
3. Adjustments to Earnings
Add-backs and other adjustments can materially affect the cash flow used in both underwriting and business valuation. A Quality of Earnings analysis should therefore evaluate whether adjustments such as non-recurring expenses, discretionary expenses, owner-related items, and other proposed add-backs are properly identified and supportable. The issue is not simply whether an adjustment has been proposed. The issue is whether it can be documented and defended.
At GCF, this principle has also been central to our Add-Back Tracing® work, which focuses specifically on verifying and documenting proposed adjustments through source financial records.
4. Earnings Sustainability & Risk
Historical earnings alone do not necessarily establish future debt-service capacity. A lender also needs to understand whether there are material factors that could affect the business’s ability to sustain those earnings following the transaction. The Quality of Earnings process should therefore consider the broader financial and operational factors that may affect the reliability and sustainability of normalized earnings.
How Is the $3 Million QoE Threshold Calculated?
The $3 million threshold is based on the business purchase price, rather than the amount of the SBA loan.
For purposes of determining whether the Quality of Earnings requirement applies, owner-occupied real estate included in the transaction is excluded based on its appraised value.
The threshold is evaluated before reducing the transaction for buyer equity, seller financing, or other financing sources.
In practical terms, a buyer cannot avoid the QoE requirement simply by contributing more equity or financing less than $3 million through the SBA loan. The relevant question is the value of the business being acquired after excluding applicable owner-occupied real estate.
Why the New SBA QoE Requirement Matters
The new requirement introduces another independent financial due diligence component into certain SBA business acquisition transactions.
That is significant because the earnings of the business affect nearly every major financial decision in the transaction.
- Debt-service coverage
- Financing structure
- Business valuation
- Buyer equity requirements
- Overall transaction risk
If normalized earnings are overstated, unsupported, or unsustainable, those issues can flow through the remainder of the underwriting process.
The Quality of Earnings report is designed to provide lenders with greater clarity before those earnings are relied upon.
The QoE also has a direct impact on the lender’s debt-service analysis.
Under the new change-of-ownership requirements, lenders must use the earnings supported by the Quality of Earnings analysis when determining debt-service coverage.
For an Initial Acquisition, the required historical debt-service coverage is at least 1.25x. For a qualifying Business Expansion, the threshold remains 1.15x.
If the normalized earnings supported by the QoE do not provide sufficient debt-service coverage for the proposed transaction, the lender cannot simply underwrite to the seller’s reported earnings or expected post-closing performance. The transaction may need to be restructured, additional equity may be required, or the SBA loan amount may need to be reduced.
This makes the Quality of Earnings report more than a compliance deliverable. Its findings can directly affect how much debt the business can support.
When Does SOP 50 10 8.1 Apply?
SOP 50 10 8.1 becomes effective October 1, 2026, but the controlling date is important.
The new SOP applies to applications that are issued an SBA loan number on or after October 1, 2026.
Applications submitted through September 30, 2026 continue to use SOP 50 10 8.
For transactions currently in process, lenders should therefore pay close attention to when the SBA loan number is issued—not simply when the application process began.
Source: U.S. Small Business Administration, SOP 50 10 8.1
How Quality of Earnings and Business Valuation Work Together
For SBA transactions requiring both a Quality of Earnings report and an independent business valuation, the two analyses should not operate in isolation.
At GCF, the process is designed as a coordinated engagement.
The Quality of Earnings analysis begins first, while the Business Valuation team simultaneously begins building the valuation file, reviewing company information, industry data, transaction details, and other materials needed for the appraisal.
As the QoE progresses, the two workstreams begin to intersect. The normalized earnings analysis, supported adjustments, cash-flow findings, and other relevant conclusions developed through the Quality of Earnings process are then incorporated into the financial analysis supporting the business valuation.
This sequencing allows the valuation team to begin its work without waiting for the QoE process to be fully completed, while still ensuring that the final valuation reflects the financial due diligence performed through the Quality of Earnings engagement.
| QUALITY OF EARNINGS establishes and supports the earnings. BUSINESS VALUATION applies valuation analysis to those earnings. |
Rather than treating the two reports as separate assignments, GCF is developing its SBA-focused process as a single coordinated engagement, with one point of engagement and one combined fee.
GCF is currently finalizing the expected timeline for this integrated process, with the Quality of Earnings and Business Valuation coordinated so both reports can be delivered at the conclusion of the engagement.
Quality of Earnings and Business Valuation Serve Different Roles
A Quality of Earnings report and a business valuation should not be viewed as interchangeable. They answer different questions.
The Quality of Earnings analysis examines the earnings. The business valuation determines what the business is worth based, in part, on those earnings.
When both services are required in the same transaction, the financial due diligence performed through the QoE can provide a stronger foundation for the cash flow ultimately considered in the valuation. For lenders, the result should be a more coordinated and supportable underwriting process.
What Should SBA Lenders Look for in a Quality of Earnings Provider?
As lenders begin implementing the new requirement, provider qualifications and scope will become increasingly important.
At minimum, lenders should consider whether the provider has experience with:
- Financial due diligence
- Cash flow analysis
- Earnings normalization
- Add-back verification
- Business acquisitions
- SBA lending requirements
The work should also be performed with sufficient independence, professional oversight, and documentation to support the lender’s underwriting process.
Who can perform an SBA Quality of Earnings report
The SBA has not established a separate governing body or universal professional standard for Quality of Earnings work. In our view, that makes provider qualifications especially important.
GCF believes an SBA Quality of Earnings engagement should, at minimum, be led and signed by a Certified Public Accountant. The work involves financial reconciliation, earnings normalization, cash-flow analysis, verification of adjustments, and conclusions that may materially affect underwriting.
GCF’s Transaction Advisory practice is led by Michael Reed, CPA, ABV, CFF. Michael’s credentials are centered around the needs of SBA business. A CPA for accounting acumen; ABV for developing business valuations; and CFF designation is particularly relevant to this type of engagement because the work requires more than reviewing financial statements. A forensic mindset is valuable when testing whether reported earnings, cash activity, adjustments, and supporting documentation reconcile and withstand scrutiny.
GCF’s Approach to SBA Quality of Earnings
GCF has served the SBA lending community for nearly 30 years and has built its reputation around independent business valuation, financial analysis, and lender-focused due diligence.
GCF Advisory, our Transaction Advisory Services Division, has been performing Quality of Earnings and related financial due diligence work in the lower middle market for several years. The new SBA requirement represents an extension of work we are already performing.
GCF’s Quality of Earnings engagements satify the SOP’s performance requirement of these types of engagements being conducted by “experienced financial professionals”, as work is performed by and under CPA supervision during the entire engagement.
Our approach emphasizes the same principles that have guided our valuation work for decades: Independent analysis. Professional qualifications. Documented support. Human judgment.
We refer to that standard as Deal Integrity™.
As the SBA provides additional guidance on SOP 50 10 8.1, GCF will continue to evaluate the requirements and refine our SBA-focused Quality of Earnings scope accordingly.
For lenders, however, the objective is already clear: The cash flow supporting an SBA acquisition should be independently verified, supportable, and sustainable before it becomes the foundation for underwriting and valuation.
Questions Our Lenders Are Asking About Quality of Earnings
The SBA has identified the areas the analysis is expected to address, but it has not prescribed a standardized report format.
Based on GCF’s current review of SOP 50 10 8.1, we believe the required scope centers on four core areas: financial reporting and reconciliation, cash-to-revenue analysis, adjustments to earnings, and earnings sustainability and risk.
Those areas should serve as the foundation of an SBA-focused QoE engagement. Additional analysis may be appropriate depending on the complexity of the business and the transaction.
No.
Transaction complexity is likely to have a greater impact on scope and fee than purchase price alone.
A relatively straightforward acquisition with one entity, clean financial records, conventional revenue recognition, and accessible accounting data may require significantly less work than a similarly sized transaction involving multiple entities, carve-outs, unusual revenue recognition, incomplete records, or other accounting complexities.
For that reason, GCF believes the engagement should be scoped to the specific transaction rather than treated as a one-size-fits-all product.
Yes, and GCF is designing its SBA process specifically around a coordinated workflow.
The Quality of Earnings analysis begins first, while the Business Valuation team simultaneously begins building the valuation file and completing the preliminary appraisal work.
As the QoE progresses, the two workstreams begin to intersect so that supported earnings, verified adjustments, and other relevant financial findings can be incorporated into the valuation analysis.
The objective is to deliver the Business Valuation and Quality of Earnings reports at the conclusion of the engagement, rather than treating the two services as separate or sequential assignments.
One engagement. One coordinated process. One fee.
Some additional time should be expected because the QoE introduces financial due diligence that was not previously required in many SBA transactions.
However, GCF is developing its process so that the QoE and Business Valuation workstreams overlap rather than occur sequentially. This should materially reduce the total time required to complete both reports.
GCF is currently finalizing the expected timeline for this integrated process.
Yes.
The SBA requirement establishes the foundation of the engagement, but the appropriate scope may need to expand depending on the transaction.
Additional analysis may be warranted when there are unusual accounting issues, customer concentration, working capital concerns, multiple entities, carve-out structures, revenue recognition questions, poor financial records, or other areas of lender concern.
The scope should ultimately reflect the level of financial risk and complexity present in the transaction.
Yes.
GCF can provide an independent review of a third-party Quality of Earnings report and identify material issues, omissions, inconsistencies, or areas that may require additional support.
This can be particularly useful when a lender receives a report from an unfamiliar provider or wants a second level of review before relying on the findings in underwriting.
The Quality of Earnings analysis must be conducted for the benefit of the lender and may not be prepared by or for the borrower or seller. A buyer- or seller-commissioned QoE may still be useful for transaction diligence, but it does not replace the lender-focused report required by SOP 50 10 8.1.
The Cash Proof is an analysis of cash receipts and disbursements that reconciles bank statement activity to the income statement and tax returns. The required review covers the trailing twelve months and the prior two fiscal years.
No.
The threshold is based on the business purchase price, excluding applicable owner-occupied real estate at appraised value. It is determined before considering buyer equity, seller financing, or other financing sources.
Yes.
The lender must use the earnings supported by the QoE when determining debt-service coverage. Initial Acquisitions require at least 1.25x historical coverage, while Business Expansions require at least 1.15x. If the supported earnings do not provide sufficient coverage for the proposed debt, the transaction may need to be restructured or the SBA loan amount reduced.
The new SOP applies to applications issued an SBA loan number on or after October 1, 2026. Applications submitted through September 30, 2026 continue to use SOP 50 10 8.
Source: U.S. Small Business Administration, SOP 50 10 8.1
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