Some do by rule, and many more expect one: from 1 October 2026 SBA requires a quality of earnings report on 7(a) acquisitions of $3 million or more excluding real estate, and financial due diligence on every change of ownership. Private credit funds and unitranche lenders commonly expect one, and banks tend to on larger deals or where add-backs are large. A QoE tests revenue recognition, add-backs, working capital and whether cash in the bank supports reported sales. When it confirms adjusted EBITDA, the lender can size on that figure instead of haircutting it, which means more senior debt at a lower price.
- Required by SBA
- From 1 October 2026, on acquisitions of $3 million or more excluding real estate
- Commonly expected
- Private credit and unitranche loans, larger bank deals, heavily adjusted earnings
- Rarely needed
- Small loans where tax returns match the books and add-backs are few
- What it tests
- Revenue recognition, add-backs, proof of cash, working capital, debt-like items
- What it changes
- The EBITDA the loan is sized and priced on
What decides whether a lender expects one
A quality of earnings report is an accounting firm's analysis of whether a company's 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 produce the adjusted EBITDA that lenders size loans on. The differences are set out in quality of earnings vs audit.
Whether a lender expects one comes down to three things. Deal size: the larger the loan, the more a lender can lose on an overstated number, and the cost of the report shrinks relative to the loan. Lender type: private credit funds and unitranche lenders lend further into a company's earnings, so they need more confidence in them; banks lending well inside the cash flow can often rely on tax returns and their own analysis. Adjustment volume: a company whose adjusted EBITDA is close to its reported EBITDA needs little testing, while one whose case depends on a long list of add-backs will be asked to prove them.
| Situation | Is a QoE expected? | What drives it |
|---|---|---|
| SBA 7(a) change of ownership of $3 million or more, excluding real estate, from 1 October 2026 | Required | SOP 50 10 8.1 |
| SBA change of ownership below that line, from 1 October 2026 | Financial due diligence required; a full QoE is the lender's call | SOP 50 10 8.1 |
| Unitranche or private credit loan for an acquisition | Commonly expected, often buy-side | Lending deep into earnings |
| Bank acquisition loan for a larger company | Often expected | Loan size and the volume of adjustments |
| Refinancing or recapitalization with a private credit fund | Often expected, commonly commissioned by the company | Adjusted EBITDA drives both size and price |
| Asset-based line of credit | Rarely; the lender runs a field exam instead | The loan is sized on collateral, not earnings |
| Small conventional refinance, books matching tax returns | Rarely | Little to test beyond the filed returns |
The asset-based row is the exception worth knowing. A line sized on a borrowing base is tested by a field exam of the receivables and inventory, not by a QoE, because the loan depends on what the collateral is worth, not on what the business earns.
SBA's rule from 1 October 2026
SOP 50 10 8.1, which governs 7(a) loans from 1 October 2026, makes financial due diligence part of every change of ownership and requires a quality of earnings report on acquisitions of $3 million or more excluding real estate. Real estate is taken out of the test, so a purchase that includes the building is measured on the business alone.
The same SOP requires a change of ownership to show debt service coverage of 1.25x on historical results, against the 1.15x SBA applies otherwise. Taken together, the two changes put more weight on one number: historical earnings, tested. An add-back that a QoE rejects now counts directly against a higher coverage bar. For how SBA and conventional acquisition loans differ more broadly, see SBA 7(a) vs a conventional acquisition loan.
A QoE does not replace SBA's business valuation. The valuation says what the business is worth; the QoE says what it earns. A deal above the valuation threshold can need both.
What the report tests
A QoE is organized as a set of workstreams. Each one answers a question an underwriter would otherwise answer with a haircut.
| Workstream | What it tests | What the lender does with it |
|---|---|---|
| Revenue recognition | Whether revenue is booked in the right period: cut-off at year-end, jobs recognized by percentage of completion, deferred revenue, bill-and-hold | Removes revenue pulled forward from the next period, which would otherwise inflate the year the loan is sized on |
| Add-backs | Each adjustment from reported to adjusted EBITDA, with support: owner compensation against a market salary, one-time costs, personal expenses | Credits the adjustments that are supported, and drops or cuts the rest |
| Proof of cash | Whether deposits in the bank statements reconcile to reported revenue, month by month | Confirms the revenue exists, the first question on any business with cash sales or thin records |
| Net working capital | Monthly normalized working capital, trends in receivables, inventory and payables | Sets the working capital peg and sizes the revolver |
| Debt and debt-like items | Leases, deposits, deferred revenue, accrued bonuses, unpaid taxes | Fixes what counts as debt at closing; see cash-free, debt-free |
| Customers and margins | Revenue and gross margin by customer, product and year | Feeds the lender's view of customer concentration |
| Pro forma and run-rate adjustments | Price increases, new contracts, cost savings, acquisitions | Usually credited only in part; see lending on run-rate EBITDA |
Two of these matter more than their length suggests. Proof of cash is where small-company books most often come up short, frequently for innocent reasons such as transfers between accounts booked as sales, but a lender cannot tell the innocent reason from the other kind without it. Revenue recognition matters most in contractors, project businesses and anything that bills ahead of delivery, where a year can look stronger or weaker than it was depending on when jobs were recognized. Cash-basis books are usually restated to accrual; see cash vs accrual financials.
How a confirmed EBITDA becomes a larger, cheaper loan
A lender facing adjusted earnings it cannot verify does one of two things: it credits only the adjustments it can see for itself, or it lends lower in its range to leave room for error. Usually both. A QoE that confirms the adjustments removes the reason for either.
Take a company with reported EBITDA of 1,000 that presents adjusted EBITDA of 1,500. Without a report, a lender credits the owner's excess salary, which the payroll records show, and little else: 1,200. With a QoE that supports most of the rest, the lender credits 1,450. Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA. At 3.5x, the gap is the difference between senior debt of 4,200 and 5,075.
| No QoE | QoE confirms most adjustments | |
|---|---|---|
| EBITDA the lender credits | 1,200 | 1,450 |
| Senior debt at 3.5x | 4,200 | 5,075 |
| Leverage if the company borrows 4,200 | 3.5 times | about 2.9 times |
| Where the rest of the capital comes from | A further 875 of mezzanine, seller paper or equity | Senior debt |
The loan is larger because the lender sizes on a larger number. It is cheaper for three reasons. First, the 875 that the senior lender now provides would otherwise have come from mezzanine debt, a larger seller note or more equity, all of which cost more than senior debt; the arithmetic is on what a layered capital stack costs. Second, many credit agreements price the loan off a leverage-based pricing grid, and the same loan measured against a higher confirmed EBITDA sits in a lower-leverage, lower-priced tier. Third, lenders write tighter terms, larger reserves and less covenant room around numbers they doubt.
There is one more benefit that is easy to miss. The adjustments in the QoE can be carried into the credit agreement's definition of EBITDA, so the covenants are tested on the same figure the loan was sized on. Without that, a company can be sized on adjusted earnings and tested on reported ones, and start its loan with far less headroom than it thought.
Sell-side, buy-side, and who can rely on it
A buy-side report is commissioned by the buyer after the letter of intent and is the one acquisition lenders lean on most, because the party who paid for it wants the number to be right rather than high. A sell-side report is commissioned by a seller before going to market. Lenders read it, discount it for who paid, and often ask for buy-side work on the areas it touches lightly.
Outside acquisitions, the company itself commissions the report. An owner planning a recapitalization or a refinancing with a private credit fund can commission one before approaching lenders, and share it with each of them. One report then settles the earnings question for every lender at once.
Reading a report is not the same as relying on it. Accounting firms limit reliance in their engagement letters, and a lender that wants to rely on the work will ask for a reliance letter addressed to it. That is worth settling when the firm is engaged, not when the lender asks.
When the report goes the wrong way
A QoE can cut earnings as easily as confirm them. That is not a reason to avoid one; a lender that finds the same problem in its own underwriting will find it later, after the price is agreed and the timetable is set. A report that trims adjusted EBITDA gives the buyer grounds to reopen the price and gives the company time to fix the records before the next process.
What a report cannot do is make the loan decision. Coverage is still tested on the lender's own view of taxes, owner salary and maintenance capex, and the lender still makes its own judgements about concentration, management and the industry. A clean QoE removes the most common source of re-trading in a loan, a dispute about what the business earns, and leaves the rest to underwriting.
Getting ready for one
A QoE goes faster and costs less when the company can hand over what the accountants will ask for on the first day:
- Business tax returns for two to three years, and the P&L and balance sheet for the same years
- Monthly P&Ls and balance sheets for the latest two years and the year to date, closed to last month-end
- Bank statements for every account, for proof of cash
- AR aging by customer with days outstanding, and AP aging
- A debt schedule, with copies of notes and leases
- Payroll records supporting owner and family compensation
- Support for every add-back: invoices, settlement agreements, one-time contracts
These are the same documents a lender reads, which is the point. Transparent builds the lender package from them, with the bridge from reported to adjusted EBITDA laid out line by line, so a lender sees what has been tested and what has not. For the acquisition-specific timing of a QoE, see quality of earnings for acquisition loans.
Common questions
- Does a bank require a quality of earnings report?
- Not as a rule. Banks decide deal by deal, and they are more likely to expect one on larger loans, acquisitions and companies whose adjusted EBITDA depends on many add-backs. On a small loan where the books match the tax returns, a bank will usually rely on its own analysis.
- Do I need a QoE to refinance my business?
- Usually not for a bank or SBA refinance. A private credit fund refinancing or recapitalizing a company on adjusted EBITDA will often expect one, and commissioning it before going to lenders lets one report serve every lender.
- Does SBA require a quality of earnings report?
- From 1 October 2026, under SOP 50 10 8.1, SBA requires one on acquisitions of $3 million or more excluding real estate, and financial due diligence on every change of ownership.
- Can a lender use a QoE the seller paid for?
- It can read it and often will, but it discounts a report for who commissioned it and may ask for buy-side work on key areas. To rely on any report formally, the lender needs a reliance letter from the accounting firm.
- Will a QoE guarantee a bigger loan?
- No. It changes the EBITDA the lender believes, which can raise the loan and lower its price. If it confirms fewer adjustments than presented, it can lower the loan instead. Either way, the lender still makes its own credit decision.