Beginning October 1, 2026, certain SBA-financed business acquisitions with a purchase price of $3 million or more require an independent Quality of Earnings (QoE) analysis as part of the lender’s underwriting process under SOP 50 10 8.1. While this is a new SBA requirement, the concept of a QoE has been used for years by buyers, sellers, and investment banks to better understand a company’s financial performance, evaluate risk, and support transaction decisions.
What is a Quality of Earnings Analysis?
To put it simply, a QoE analysis answers the question: what does the business actually make, and how much confidence can be placed in the underlying earnings? For a common real estate comparison, a QoE is like a financial inspection before a home sale. Before a buyer or lender commits, an independent professional reviews multiple facets of the business to determine its true ongoing earnings power.
Further, many small-to-midsize business owners run their lives through the business and manage earnings to minimize taxes. The term “window dressing” is often used to describe how sellers can change the way expenses are classified in the recent periods leading up to a transaction. How do buyers know what is real and what is posture?
A typical QoE can help by addressing the following questions to provide a clearer picture of a company’s normalized earnings and potential risk areas:
Are earnings sustainable?
Are EBITDA adjustments and expense add-backs supportable?
Is there significant customer or vendor concentration?
How dependent is the business on the owner or a key employee?
Are there deferred capital expenditures or overhead expenses needed?
How much working capital is truly required to operate the business?
Does the reported cash that moves through the business match the bank account activity?
Which Transactions are Impacted?
This requirement applies to Business Expansion and Initial Acquisition transactions. Owner Buyout and ESOP & Cooperative transactions are exempt from the QoE requirement because the existing owner remains involved in the business, and the transaction does not result in a change to its management or operating structure.
Why This Matters to Stakeholders
The QoE has specific implications for all parties in a transaction. Specifically:
For buyers, it helps support confidence in the target company’s earnings and provides insight into what is driving profits.
For lenders, it strengthens underwriting and supports that the post-transaction earnings can cover new debt service levels.
For sellers, it can provide prospective on how buyers and lenders may view the business.
This new requirement on the part of the SBA may indicate a trend of lenders requiring increased visibility at the time of a transaction. Whether facing lender requirements for a specific loan or positioning themselves for a future transaction, business owners who prepare and maintain clear financial documentation are well positioned to capitalize on new opportunities, get a deal closed timely, and get a deal done and maximize value.
More Than a Required Transaction Step
While Quality of Earnings analyses are often associated with acquisitions and transactions, the insights they provide can be valuable throughout the life of a business.
Owners who take the time to better understand their earnings profile, value drivers, and potential risk areas are often better positioned to “stay ready so they don’t have to get ready”, and in the process are able to:
Make strategic business decisions
Plan for retirement
Evaluate growth opportunities
Strengthen banking relationships
Support valuation discussions
Respond confidently and timely when opportunities arise
What do Business Owners Need to do Today?
You do not need to be planning for a sale tomorrow to benefit from understanding your readiness today.
Whether you're several years from retirement, considering a future ownership transition, evaluating growth opportunities, or simply looking to better understand the value of what you've built, preparation creates options.
At Faulk & Winkler, we help local business owners evaluate where they stand today and develop a roadmap for the future through services that may include:
Exit and transition readiness assessments
Quality of earnings planning and analysis
Business valuations
Strategic and succession planning
Client accounting services (CAS)
Transaction advisory services (including buy-side and sell-side diligence)
Tax and estate planning coordination
The goal is to understand where you are today so you can make informed decisions about tomorrow.
Stay ready, so you don’t have to get ready.