SBA 7(a) Change-of-Ownership Loans Now Require an Independent Quality of Earnings Report
SBA 7(a) now requires lenders to obtain an independent quality of earnings report for certain change-of-ownership transactions with a business purchase price of $3 million or more, and to underwrite the loan on the earnings that report supports.
| Topic | SBA 7(a) Quality of Earnings Requirement |
| Effective | October 1, 2026 |
| Applies To | Initial Acquisition and Business Expansion Loans of $3 Million or More |
| Policy | SBA SOP 50 10 8.1 |
- Effective October 1, 2026, SBA 7(a) lenders must obtain an independent quality of earnings (QoE) report on Initial Acquisition and Business Expansion change-of-ownership loans where the business purchase price is $3 million or more.
- The report must come from an independent financial professional and be commissioned by and for the benefit of the lender. A report prepared by or for the buyer or seller does not, on its own, satisfy the requirement.
- Lenders must underwrite repayment ability on the QoE’s normalized EBITDA, not on management-presented add-backs or projected earnings.
- Owner buyouts, ESOP conversions, and cooperative conversions are exempt.
Historically, SBA 7(a) acquisition loans were often sized and underwritten on seller-prepared adjusted EBITDA with limited independent scrutiny. SOP 50 10 8.11 now ends that practice for Initial Acquisition and Business Expansion transactions with a business purchase price of $3 million or more.
The $3 million threshold excludes owner-occupied real estate and is measured before any equity injection or seller financing.
The QoE must reconcile the business’s accountant-prepared financial statements, tax returns, and internal financial statements to produce a normalized, adjusted EBITDA figure. It must also include:
- A “cash proof.” A reconciliation of bank statement activity to the income statement and tax returns for the trailing twelve months and each of the last two fiscal years.
- Documented add-backs and adjustments. The report must identify and document the add-backs and adjustments to the seller’s reported earnings.
- An assessment of the revenue base. The quality and sustainability of revenue, including customer concentration risk, backlog and contract continuity, and the durability of existing revenue and margins.
The report must be performed by an independent financial professional and commissioned by and for the benefit of the lender. A report prepared by or for the buyer or seller does not, on its own, satisfy the requirement.
Owner buyouts, ESOP conversions, and cooperative conversions are exempt from the QoE requirement.
Underwrite to the ReportLenders must underwrite repayment ability using the QoE’s normalized EBITDA, rather than management-presented add-backs or projected earnings.
Lenders must use the QoE’s earnings figure when calculating debt service coverage. If the independent analysis does not support a specific adjustment or add-back, that amount is excluded from the earnings the lender may rely on to size the loan.
If a deal has been priced on an adjusted EBITDA that relies on aggressive add-backs and the QoE disallows them, the result may be:
- A smaller-than-expected loan.
- A larger equity injection from the buyer.
- A renegotiated purchase price.
- A deal that no longer qualifies for SBA financing on its current terms.
The new requirement raises the cost of late-stage revisions to a seller’s EBITDA. Sellers who have historically relied on aggressive adjustments to present a higher adjusted EBITDA should expect a lender-commissioned analysis to scrutinize those adjustments far more closely than a motivated buyer typically would.
Although a seller-commissioned QoE will not satisfy the SBA requirement, a business that completes one before going to market can identify and address weak add-backs in advance, reducing the risk of late-stage surprises and supporting a smoother, faster financing process.
The Takeaway
For SBA-financed acquisitions at $3 million or more, the earnings figure that sizes the loan will now be the one an independent analysis supports, not the one presented in the marketing materials.
Buyers should expect their price to be tested against that figure, and sellers can reduce the risk of a late surprise by understanding, before going to market, which of their add-backs will hold up.
1 SOP 50 10 governs the SBA’s loan origination policies and procedures for the 7(a) and 504 loan programs. This article is provided for general informational purposes and does not constitute legal, tax, lending, or investment advice. Lenders, buyers, and sellers should consult qualified advisors and the SBA’s current guidance with respect to any specific transaction.
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