SBA Quality of Earnings Requirement: What Lenders Need to Know About SOP 50 10 8.1

Effective October 1, 2026, SBA SOP 50 10 8.1 mandates a separate Quality of Earnings (QoE) report for $3M+ business acquisitions and expansions (less appraised real estate) under the 7(a) and CDC/504 loan programs. Owner Buyouts and ESOPS are exempt.

For SBA lenders, this represents an important change in the financial due diligence supporting larger business acquisition loans.

While additional guidance surrounding implementation may continue to develop, the purpose of the requirement is becoming increasingly clear: lenders need an independent, documented basis for determining whether the cash flow supporting a transaction is verified, supportable, and sustainable.

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.

What is 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-to-Revenue Analysis

Reported revenue should be supported by the actual cash activity of the business. A cash-to-revenue analysis provides an additional level of verification by examining whether cash activity is consistent with the revenue reflected in the company’s financial records. For lenders, this helps provide greater confidence that the earnings supporting the transaction are based on actual operating activity.

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.

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.

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.

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 are overseen by experienced financial professionals, performed under CPA supervision, and formally signed by a Certified Public Accountant.

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

What qualifications should an SBA Quality of Earnings provider have?

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. His Certified in Financial Forensics 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.

Is there a standard SBA scope for a Quality of Earnings report?

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.

Will every SBA Quality of Earnings engagement have the same scope and fee?

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.

Can the Quality of Earnings and Business Valuation be performed at the same time?

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.

Will the Quality of Earnings requirement increase the transaction timeline?

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.

Can an SBA lender request analysis beyond the required QoE scope?

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.

Can GCF review a Quality of Earnings report prepared by another provider?

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.

Keep Learning About Business Valuations

How to Navigate The Business Valuation Process Successfully

The Great Debate: Business Valuation With or Without Inventory

What Is Business Valuation? Why & When You Need One

Our Accreditations

Your GCF Business Valuation appraisal team has one or more of the following business valuation accreditations:

Accredited Senior Appraiser (ASA) – is recognized as having achieved the highest level of education, training, and report writing for business valuations. The ASA designation is the gold standard for a business valuation professional. (source: American Society of Appraisers)

Certified Business Appraiser (CBA) – a very prestigious credential in the eyes of all who are familiar with it as it earned the reputation of being a difficult credential to obtain. (source: National Association of Certified Valuators and Analysts®)

Certified Valuation Analyst (CVA)

Accredited in Business Valuation by the American Institute of CPAs (ABV by AICPA) – a credential granted exclusively by the AICPA to qualified valuation professionals who demonstrate expertise in valuation through knowledge, skill, experience, and adherence to professional standards. (source: American Institute of CPAs)

Accredited in Business Valuation (ABV) – credential is granted exclusively by the AICPA to CPAs and qualified valuation professionals who demonstrate considerable expertise in valuation through their knowledge, skill, experience, and adherence to professional standards. (source: American Institute of CPAs)

• Certified Public Accountant (CPA)

Over 25 years of experience and expertise in business valuations and appraisals.  An accredited appraiser receives extensive training, remains in good standing, and follows specific industry practices to determine the value of a business.

 

GCF’s Machinery and Equipment Appraisal Accreditations

 

• Expert Equipment Certified Appraiser (EECA) – Our appraisers are recognized with a deep understanding of valuation principles and extensive experience by the Institute of Equipment Valuation.

• Certified Machinery and Equipment Appraiser (CMEA) – a CMEA professional has the expertise and certification to conduct a third party machinery and equipment appraisal.