Does the SBA require a quality of earnings report when buying a business?

Yes, on larger acquisitions. Since October 1, 2026, SBA's rules require the lender to obtain a quality of earnings report, on top of the business valuation, when the business purchase price is $3 million or more and the deal is an initial acquisition or a business expansion. The rule sits in Appendix 15 of SOP 50 10 8.1.

Three details decide whether your deal is above or below the line.

The threshold is measured before financing. SBA sets it on the purchase price itself, before buyer equity, seller debt or any other funding source is applied. Structuring the deal differently does not move you under the threshold.

Real estate comes out of the number. SBA defines the business purchase price as the price in the purchase and sale agreement less the owner-occupied commercial real estate being acquired, valued at its appraised value. A $3.4 million deal that includes a building appraised at $600,000 is a $2.8 million business purchase price, and the requirement does not apply.

Some transaction types are exempt. Owner buyouts and ESOP or cooperative transactions are outside the requirement. SBA's stated reason is that the existing owners keep operational knowledge of the business and the transaction does not change the management or operating structure. Acquisitions of owner-occupied special purpose property are also exempt from the quality of earnings requirement regardless of purchase price, though the business valuation is still required.

Can you use a report you already paid for?

This is the part most summaries get wrong. SBA's text expressly contemplates a buyer commissioning its own quality of earnings report before approaching a lender, and allows the lender to have that report reviewed by one of its approved vendors to help manage cost. The reviewing vendor's findings go in the loan file alongside the original report.

The limit is that the lender may not rely on a report prepared by another party without that review. So a buyer-side report is not wasted work, but it is also not automatically accepted. Ask your lender early which vendors it will accept a review from.

One restriction is absolute: the report must not be prepared by or for the seller. A sell-side report supplied in a broker's package does not satisfy the requirement.

Note that the business valuation follows a stricter rule than the quality of earnings report. SBA requires the valuation to be requested by and prepared for the lender, and the lender may not use one prepared for the buyer or the seller.

What the report has to cover

SBA specifies the work, not just the deliverable. The analysis must reconcile the business's accountant-prepared financial statements, tax returns, internal statements and IRS transcript data into a normalized earnings figure reflecting recurring, arm's-length operations.

It must include a cash proof: a reconstruction of cash receipts and disbursements that reconciles bank statement data to the income statement and the tax return for each period reviewed, designed to surface unreported income and undisclosed expenses. The cash proof runs on a trailing twelve-month basis and across the last two fiscal years, with scope reduced if the business has operated for less than two years.

It must document every add-back and adjustment, including non-recurring items, above or below market owner compensation, related-party transactions, deferred maintenance, and differences between cash-basis and accrual-basis reporting. It must assess revenue quality, covering customer concentration, contract continuity and whether existing revenue and margins are likely to hold after the sale.

Finally, the lender must use the earnings figure from the report in its debt service coverage calculation and keep the report in the credit file. That is the part buyers feel: the report does not just inform the lender, it sets the earnings number the loan is sized against.

Below $3 million

Nothing is required. Whether diligence makes sense then is a commercial question about the quality of the books and the size of your downside, not a regulatory one.

Considering a business purchase? BankableDeal can help review the earnings, add backs, and working capital behind the deal.