The bank may order the QoE now

A quality of earnings report used to sound like a buyer-side diligence project. The buyer wanted a closer look at recurring earnings, add-backs, cash, customer concentration, and the parts of the financial story that do not show up cleanly in a tax return. The buyer or the buyer's advisors usually set the scope, commissioned the work, and carried the report into the transaction.

That job is still real. It may no longer be the only job in the room.

New SBA change of ownership rules put more responsibility on the lender to obtain and use a Quality of Earnings report in certain transactions. A lender may now need a report that is independent, experienced, and prepared for the lender's benefit. A report commissioned by the buyer may contain the same underlying numbers and still not satisfy the lender's compliance process.

That is the uncomfortable part. The financial facts may not change. The report's purpose, scope, and intended user can change. Same numbers. Different job.

In practice, that can mean the lender orders the QoE through its designated channel or directs the engagement language, even when a buyer has already started similar work. The point is not to create ceremony. It is to give the lender a report it can use for the responsibility now sitting in its credit file.

What the new rule is trying to do

The new SBA procedure takes effect October 1, 2026, for applications issued an SBA loan number on or after that date. It adds clearer financial due diligence requirements to change of ownership lending. For an Initial Acquisition or Business Expansion with a business purchase price of $3 million or more, the lender must obtain a QoE in addition to the required business valuation. Owner buyouts and ESOP or cooperative transactions are treated differently because the existing owners retain operational knowledge and the management structure does not change in the same way.

The report is not meant to be a decorative appendix. The lender must use the QoE findings in its Debt Service Coverage calculation and retain the report in the credit file. If the normalized earnings do not support the proposed valuation and debt structure, the debt may need to be reduced or the equity structure may need to change.

That makes the QoE part of underwriting, not only a buyer's comfort exercise.

A lender's QoE has a defined purpose

The rule describes a QoE as an independent financial due diligence report that examines the reliability, sustainability, and accuracy of historical and projected earnings. It also requires a Cash Proof. In plain language, that means the analysis should reconstruct cash receipts and disbursements by reconciling bank statement data to the income statement and tax return for each period under review.

The work also has to reconcile the accountant prepared financial statements, tax returns, internal financial statements, and IRS transcript data. It should produce a normalized earnings figure that reflects recurring, arm's-length operations. The report should identify and document adjustments such as non-recurring revenue or expenses, owner compensation that is above or below market, related party transactions, deferred maintenance, and differences between cash and accrual reporting.

That scope is familiar to anyone who has lived through diligence. The change is who the report is for and how the lender is expected to use it.

Why a buyer commissioned report may not travel

A buyer commissioned QoE can be thorough and useful. It can help a buyer understand what they are buying, identify questions for the seller, and negotiate from a clearer view of sustainable earnings. None of that makes the report automatically available for lender reliance.

The SBA language says the QoE must be conducted for the benefit of the lender. It also says the report may not be prepared by or for the borrower or seller. Those are not small wording choices. They describe a different relationship among the lender, the financial professional, and the transaction.

A lender may ask:

• Who retained the professional?
• What did the engagement letter say about the intended user and purpose?
• Was the scope designed to meet the lender's requirements?
• Does the report include the required Cash Proof and the required periods?
• Can the lender rely on the report in its credit file?
• Will the professional answer lender questions or update the analysis if the debt structure changes?

If the answer to those questions is unclear, the lender may require a new engagement, a supplemental scope, or a separate report. That can feel repetitive when everyone is looking at the same general ledger and bank statements. It is still a different compliance path.

The timing matters more than it first appears

We had a lender conversation on September 4 that made the timing issue feel less theoretical. The question was not only whether a QoE would be needed. The question was who would order it, when the engagement would start, what report the lender could use, and whether the transaction would wait for the answer.

That is where a rule change turns into a closing risk. A buyer can be ready to provide a report. The lender can still need to confirm that the report meets its own requirements. A financial professional can be available. The engagement can still need to be directed to the lender. A report can be nearly complete. The lender can still need a Cash Proof, a revised scope, or a response to a credit question before it can finish underwriting.

None of the people involved have to be doing anything wrong for the process to slow down. The parties can simply be working from different definitions of finished.

There is still room for interpretation

The effective date is clear. The practical workflow is less settled.

The SBA information notice says SOP 50 10 8.1 becomes effective October 1, 2026, and that applications submitted through September 30 continue under the prior procedure. The new SOP also allows a lender processing under PLP authority to obtain and review the business valuation and QoE after the SBA loan number is issued and before closing, as long as the work is in process. The valuation and applicable QoE must be formally engaged when the loan number is issued.

That gives lenders a path for sequencing. It does not answer every question a buyer or seller will have about the exact vendor channel, engagement language, reliance rights, turnaround time, or the treatment of a report already underway. September procedural notices and lender level implementation will likely add important detail.

Until that detail arrives, the safest posture is not to pretend the ambiguity is gone. Ask the lender what it needs in writing. Ask which requirements apply to the particular transaction. Ask whether a buyer side report can be used as background while a lender directed engagement satisfies the lender's file. Ask when the work has to be engaged and when the final report has to be delivered.

What to clarify before the deal is waiting

A short conversation early can prevent a long conversation after the credit package is assembled. We would put these questions near the front of the transaction checklist:

• Does the purchase structure and price require a lender obtained QoE under the new procedure?
• Which transaction category does the lender believe applies?
• Is the lender using PLP authority or submitting the application to the appropriate processing center?
• Who must retain the financial professional, and what must the engagement letter say?
• Can a buyer commissioned report be shared for background, or will the lender require a separate engagement?
• What periods must the Cash Proof cover?
• What source documents will be required, and who will coordinate them?
• What is the expected review and response process if the lender has follow up questions?

These questions are not an argument with the lender. They are a way to make the lender's process visible before the process becomes a condition to close.

The cost is more than a line item

Financial due diligence costs can be passed to the borrower under the new rules, and the work takes time from the seller, buyer, lender, and financial professional. That makes cost and process part of the transaction plan. The lowest initial fee is not necessarily the lowest total cost if the scope has to be repeated or the closing waits for a report that was not commissioned for the lender.

We are not suggesting that every buyer should order two reports. We are suggesting that the parties understand the intended user before anyone assumes a report will travel. Sometimes one engagement can serve the necessary parties if the scope, reliance, and lender direction are clear. Sometimes the lender will want its own work. The right answer belongs in the lender's process, not in an assumption made late in diligence.

The operating books still matter

A lender directed QoE does not remove the need for clean monthly reporting. It makes the quality of the underlying records more visible. If the books are on a cash basis while the business is discussed on an accrual basis, the team should be able to explain the difference. If owner expenses run through the company, the records should show the pattern. If commissions, payroll, or one time costs land in an unusual month, the bridge should be documented rather than reconstructed under deadline.

The best preparation is not trying to manufacture a better earnings number. It is making the actual business easier to understand. A clear close process, reconciled accounts, consistent classifications, and a short explanation for unusual items give the lender and the financial professional a better starting point.

The report may use the same numbers. The question is whether it was prepared for the job the lender now has to perform.

At Arrowhead Strategy Group, we work with founders, owners, and operators in the $500K - $10M range who are trying to keep a transaction moving without losing the thread of the business underneath it. We help name the reporting gaps, the timing questions, and the decisions that should be clarified with the lender before they become closing surprises.

If you want a clear first read on what your lender may ask for and what to clarify next, we will spend 30 minutes on it with you.

No pitch. No pressure. Schedule your 30-minute diagnostic with Arrowhead Strategy Group.