Do lenders require a quality of earnings report to finance an acquisition?

Required, expected, or overkill

A quality of earnings report, or QoE, is an accounting firm's analysis of whether a business's reported earnings are real, recurring and correctly adjusted. It is not an audit: it gives no opinion on the financial statements, and an audit does not give the adjusted EBITDA a lender sizes on. The difference is set out in quality of earnings vs audit. Whether a lender makes one a condition of the loan depends on three things: the program, the size of the deal, and how far the seller's earnings figure travels from the tax return.

The last row matters as much as the first. On a small deal where the owner's books match the filed returns, the only add-backs are the owner's own salary and a few personal expenses, and the lender is lending well inside the cash flow, a QoE can cost the buyer money and add a step to the closing without changing a single number in the credit memo. The more the price depends on adjustments, the more the report earns its cost. How lenders read the gap between books and returns is on seller financials vs tax returns.

SBA's rules before and after 1 October 2026

Under SOP 50 10 8, SBA did not require a quality of earnings report on an acquisition. The lender analyzed the seller's tax returns and financial statements itself, and a lender could ask for a QoE under its own credit policy. SOP 50 10 8.1, which governs loans from 1 October 2026, changes that in two steps. Every change of ownership now needs financial due diligence. And an acquisition of $3 million or more, excluding real estate, needs a quality of earnings report.

The $3 million test excludes real estate, so a purchase that includes the building is measured on the business alone. Buyers pricing a deal close to the line should ask the lender early which side of it the file falls on, because it changes both the cost and the order of the third-party work. Other SBA reports sit beside it: an independent business valuation is required where the amount financed, less appraised real estate and equipment, exceeds $250,000 or buyer and seller are related, and the loan for the purchase cannot exceed that valuation.

The same SOP raises the coverage test for a change of ownership to 1.25x on historical results, from the 1.15x that applies otherwise. That makes the historical earnings figure more important, not less: a QoE that cuts adjusted EBITDA can move a deal from passing to failing on coverage alone.

From 1 October 2026, an SBA acquisition of $3 million or more excluding real estate cannot close without a quality of earnings report.

What the report settles: one EBITDA figure

Every acquisition lender sizes the loan on a cash-flow figure, and every seller's broker presents the most generous version of it. Between the two sits a list of add-backs: owner compensation, one-time legal bills, a family member on payroll, a year of unusual repairs. Without a QoE, the lender's analyst works through that list alone, and each item the lender rejects is an argument conducted after the price has been agreed. With a QoE, an independent accountant has already tested each one, and the lender starts from a figure that has been through a proof of cash.

In this example the report trims adjusted EBITDA from 1,200 to 1,120. A senior cash-flow lender willing to go to the top of the common 2x to 3.5x range would have sized the loan at 4,200 on the seller's figure and sizes it at 3,920 on the tested one. That is less debt, but it is debt the lender will actually commit to. The alternative is worse: the same reduction found by the lender's own analyst late in underwriting, after the buyer has spent on legal work and the seller has planned around a closing. How lenders move from earnings to loan size is on how much debt a business can carry.

What a lender reads first in a QoE

A QoE can run long. A credit analyst reads it in a particular order, looking for the numbers that feed the loan:

• The EBITDA bridge. Reported earnings to adjusted earnings, line by line, with each adjustment accepted, reduced or rejected. This is the page the loan is sized on.
• Proof of cash. Whether deposits in the bank statements support reported revenue. A business whose revenue does not reach the bank is a different credit from the one on the P&L.
• Net working capital. The normal level of receivables, inventory and payables, month by month. It feeds the working capital peg and tells the lender whether the business will be handed over with enough to run on.
• Trend in the latest months. Whether the trailing twelve months are better or worse than the last full year, and why.
• Customer concentration. How much of the earnings depends on a few customers, which changes how much a lender will lend against them. See customer concentration in an acquisition.
• Debt-like items. Customer deposits, deferred revenue, unpaid bonuses and old payables that the buyer may inherit and the lender will treat as debt.

A report that rejects most of the seller's adjustments is not a failed report. It is the report doing its job. The lender will size on the tested figure, and the buyer can use the same findings to reopen the price before signing the purchase agreement.

Who pays, and who can rely on it

In most lower-middle-market deals the buyer commissions a buy-side QoE after the letter of intent and pays for it. Some sellers commission a sell-side report before going to market, to support the price. Lenders read a sell-side report, but they know who paid for it, and on larger or sponsor-backed deals they may still ask for buy-side work, or for the sell-side firm to answer their own questions.

Reading a report is not the same as relying on it. Accounting firms limit who may rely on their work in the engagement letter, and a lender that wants to rely on the report, rather than just read it, will ask for a reliance letter addressed to it. Buyers should raise this before the engagement is signed. A report the lender cannot rely on can mean a second round of work at the worst possible moment. On an SBA deal, ask the lender which firms and what scope it will accept before engaging anyone; a report that does not meet the lender's procedures does not satisfy the condition.

Timing matters too. Commissioning a QoE before a lender has seen the deal risks paying for a report on a business no lender will finance at the agreed price. The better order is the letter of intent, a lender's indicative terms, then the QoE, as laid out in the steps from LOI to closing.

What a QoE does not do

A quality of earnings report tells the lender what the business earned. It does not tell the lender whether to lend. That decision still runs through the lender's own underwriting, and a clean QoE does not shorten it:

• Debt service coverage is still tested against the lender's own requirement, on the lender's own view of the buyer's salary, taxes and capital spending.
• The lender still verifies the filed returns with the IRS and still reads the buyer's personal financial statement, credit and management experience.
• Collateral, guarantees and the equity injection are judged the same way with or without a report.
• A lender may accept the QoE's figure and still size below it if the trend is down or the business depends on the seller.

What the report removes is the most common source of delay and re-trade in an acquisition loan: a disagreement about what the business earns. Transparent builds the financing model and lender package on the same adjusted figures, with the bridge from reported to adjusted EBITDA shown line by line, so a lender sees the adjustments before it sees the ask. A fuller treatment of how lenders use a QoE across all debt, not only acquisitions, is on quality of earnings for lenders, and the term is defined in the glossary.