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New SBA lending requirements are changing how certain business acquisitions are evaluated. For buyers considering the purchase of an accounting firm, law firm, or other professional service business, understanding these changes is an important part of preparing for a successful transaction.
Effective October 1, 2026, the U.S. Small Business Administration (SBA) introduced updated lending guidance under Standard Operating Procedure (SOP) 50 10 8.1. Among the changes is a new Quality of Earnings (QofE) requirement for certain SBA-financed business acquisitions with a purchase price of $3 million or more.
While QofE reports have long been part of larger mergers and acquisitions (M&A) transactions, the updated guidance makes this financial analysis mandatory for certain qualifying SBA 7(a) acquisitions.
For buyers, the change means greater financial scrutiny, additional due diligence, and potentially more preparation before closing a transaction.
What Is a Quality of Earnings Report?
A Quality of Earnings (QofE) report is an independent financial analysis that evaluates the accuracy, consistency, and sustainability of a company's earnings.
Unlike a traditional financial statement review, a QofE analysis goes beyond reported revenue and profitability to examine the financial performance supporting a business's valuation.
A QofE report typically evaluates:
- Revenue consistency: Whether revenue is recurring, sustainable, and supported by financial records.
- Adjusted earnings: Whether proposed adjustments to earnings, commonly called add-backs, are legitimate and supportable.
- Cash flow: Whether reported earnings align with actual cash generated by the business.
- Client concentration: Whether a significant percentage of revenue depends on a limited number of clients.
- Operating expenses: Whether expenses accurately reflect the cost of operating the business under new ownership.
- Financial trends: Whether historical performance supports expectations for continued profitability.
For professional service businesses, these findings can be particularly important. An accounting practice with recurring client relationships may have a different financial risk profile than a law firm whose revenue depends on the timing and outcome of individual cases.
Understanding these differences helps buyers determine whether a practice's historical financial performance can reasonably continue after an ownership transition.
What Changed Under the New SBA Rules?
Under SBA SOP 50 10 8.1, lenders must obtain an independent Quality of Earnings report for certain SBA 7(a) initial acquisition and business expansion transactions when the business purchase price is $3 million or greater.
The threshold is based on the business purchase price, rather than simply the amount being financed. Owner-occupied commercial real estate is treated separately when determining the applicable business purchase price.
For example, a buyer purchasing an accounting firm for $3.5 million may be subject to the requirement even if the SBA loan finances only a portion of the transaction.
The updated guidance applies to loans receiving an SBA loan number on or after October 1, 2026.
There are several important distinctions buyers should understand.
1. The report must be independent.
The lender must obtain a QofE analysis from an experienced, independent financial professional for the lender's benefit. A report commissioned by the buyer or seller does not automatically satisfy the requirement.
2. A QofE report does not replace a business valuation.
A business valuation estimates what a company is worth, while a QofE report evaluates the reliability and sustainability of its earnings. Both serve different purposes in the acquisition process.
3. The findings can affect financing decisions.
Lenders must consider the earnings supported by the QofE analysis when evaluating debt service coverage. If verified earnings are lower than originally represented, the amount of financing available could be affected.
4. Not every acquisition requires a QofE report.
The mandatory requirement applies to qualifying SBA-financed initial acquisitions and business expansions meeting the purchase price threshold. Certain other transaction types, including owner buyouts and qualifying employee ownership transactions, are excluded from this specific requirement.
However, lenders may still request additional financial due diligence for transactions that fall below the threshold.
Why These Changes Matter for Business Buyers
For buyers, the new requirement places greater emphasis on verifying a business's financial performance before completing an acquisition.
Consider a professional practice marketed with $1 million in adjusted annual earnings. During the QofE review, an independent financial professional determines that certain owner-related expenses cannot reasonably be added back or that some reported revenue is unlikely to continue.
If normalized earnings are ultimately determined to be $850,000, the difference could materially affect the buyer's financing, valuation assumptions, and overall acquisition strategy.
This is especially relevant for professional service practices, where financial performance may depend on factors that are not immediately apparent in the income statement.
Accounting and CPA Firms
Buyers should evaluate recurring revenue, client retention, seasonal cash flow, staffing expenses, and the transferability of client relationships.
A practice with strong annual revenue may still present financial risks if a significant portion of its client base depends on the selling owner's personal relationships.
Law Firms
Revenue sustainability can vary significantly depending on practice area, billing arrangements, case pipelines, and collections.
Buyers should carefully evaluate historical revenue, work in progress, outstanding receivables, and the extent to which earnings depend on individual attorneys.
A QofE analysis may identify financial risks associated with reimbursement changes, operating expenses, or revenue concentration.
These considerations were already important in acquisition due diligence. The updated SBA requirements reinforce the importance of understanding the financial condition of a practice before committing to a purchase.
How Buyers Can Prepare for the New Requirements
Although the lender is responsible for obtaining the required QofE report, buyers can take several steps to prepare for the additional scrutiny.
Start financial due diligence early.
Review historical financial statements, tax returns, cash flow, and proposed earnings adjustments before advancing too far into negotiations. Identifying discrepancies early can reduce the likelihood of unexpected complications.
Understand the seller's adjusted earnings.
Not all add-backs are created equal. Expenses identified as personal, discretionary, or nonrecurring should be supported by documentation and evaluated to determine whether they will genuinely disappear following the acquisition.
Evaluate revenue sustainability.
Historical profitability is important, but buyers should also understand what drives that profitability. Client retention, recurring service agreements, referral relationships, and dependence on key employees can all influence future performance.
Plan for additional time and expense.
An independent QofE review may introduce additional costs and documentation requirements. Buyers should discuss the anticipated process with their lender early and incorporate sufficient time into the transaction schedule.
Work with experienced M&A professionals.
Acquiring a professional practice involves more than reviewing financial statements. Buyers must also evaluate operational risks, transition requirements, financing options, and the long-term viability of the business.
Experienced transaction advisors can help buyers understand the acquisition process, identify potential concerns, and coordinate with the appropriate financial and legal professionals.
What Do the New Rules Mean for Sellers?
Although the updated SBA guidance primarily affects lenders and buyers, sellers should also pay attention.
For practice owners considering a sale, accurate and well-organized financial records are increasingly important.
Unsupported earnings adjustments, inconsistent financial reporting, or discrepancies between tax returns and internal financial statements could complicate a buyer's financing process.
Sellers who prepare early may be better positioned to respond to financial due diligence requests, support their asking price, and maintain momentum throughout the transaction.
This is another reason why preparing a professional practice for sale well before entering the market can make a meaningful difference.
A More Informed Approach to Business Acquisitions
The SBA's updated Quality of Earnings requirements reinforce an important principle in business acquisitions: understanding how much a business earns is only part of the equation. Buyers must also understand how reliable and sustainable those earnings are.
For buyers, additional financial scrutiny may create more work during the acquisition process. However, it can also provide greater clarity into the financial condition of a potential investment.
A successful acquisition should be built on reliable financial information, realistic expectations, and a clear understanding of the business being purchased.
At Private Practice Transitions, we understand the complexities involved in buying and selling professional practices. Our team provides full-service M&A and brokerage services, helping buyers and sellers navigate transactions with the guidance and expertise needed to make informed decisions.
Considering the purchase of an accounting firm, law firm, or other professional practice?
Contact Private Practice Transitions to learn more about our available opportunities and how our team can assist you throughout the acquisition process.
Sources and Further Reading
- U.S. Small Business Administration: SOP 50 10, Lender and Development Company Loan Programs. Refer to SOP 50 10 8.1, particularly Appendix 15, for the updated change-of-ownership and Quality of Earnings provisions effective October 1, 2026.
- U.S. Small Business Administration: 7(a) Loan Program. Official information about SBA 7(a) financing, eligibility, and loan requirements.
Disclaimer: This article is intended for general informational purposes and does not constitute financial, legal, or lending advice. Buyers and sellers should consult their lender and qualified professional advisors regarding the requirements applicable to their transaction.
