SBA mandates QoE for $3M deals

The U.S. Small Business Administration has set October 1, 2026 as the effective date for SOP 50 10 8.1, the agency’s updated loan-origination manual for 7(a) and 504 lenders. SBA’s notice announcing the new version says it applies to lenders, certified development companies, borrowers and SBA staff. (sba.gov) The change drawing the most attention in the lower middle market is a new Quality of Earnings requirement on certain larger acquisition financings. (ampbusinessvaluations.com) Industry advisers and valuation firms say the rule applies to 7(a) change-of-ownership transactions at $3 million and above, adding a separate third-party diligence report to files that already require an independent business valuation. (sba.gov) ### Which deals are affected first? October 1, 2026 is when SOP 50 10 8.1 becomes effective, according to SBA’s notice and the document page for SOP 50 10. Advisers tracking the release say the new Quality of Earnings mandate is tied to certain 7(a) change-of-ownership transactions with a purchase price of $3 million or more. (sba.gov) The SBA materials available on its site confirm the effective date and the issuance of SOP 50 10 8.1, but the detailed QoE provisions are being described publicly mainly through lender and advisory analyses published after the release. Those analyses say the requirement sits alongside, not instead of, the SBA valuation work already familiar in acquisition lending. (ampbusinessvaluations.com) ### What does the new report have to cover? Quality of Earnings reports described by multiple advisory firms include a normalized EBITDA bridge, testing of proposed add-backs, proof of cash, and an assessment of whether reported revenue is sustainable after the ownership change. (sba.gov) Several firms say lenders must underwrite to the earnings established through that work rather than simply accept seller-presented adjusted EBITDA. Proof of cash has emerged as one of the most specific new work items in those descriptions. QOE Agent, BPM and other advisers say the report is expected to tie earnings to actual cash generation and identify where accrual results, working capital movements or one-time items distort operating performance. (sba.gov) ### Why are lenders and buyers focused on EBITDA normalization? The $3 million threshold matters because SBA-backed acquisition loans are repaid from the target company’s cash flow. Advisory firms say a formal QoE changes the underwriting conversation from “what EBITDA did the seller market” to “what earnings survive diligence and support debt service.” (bpm.com) A separate lender-side implication is consistency. Firms marketing SBA-focused diligence services say banks are building lender-specific report formats and workflows so credit teams can compare add-backs, customer concentration, margins and cash conversion across deals using a common template. (bpm.com) ### Does this replace the valuation already required in SBA deals? SOP 50 10 has long governed SBA loan origination, and the new manual remains the core source for 7(a) and 504 policy. The new QoE requirement, as described by advisers, does not replace the independent valuation requirement on eligible acquisition loans; it adds another diligence layer for larger transactions. (auxocapitaladvisors.com) That means borrowers, lenders and M&A advisers may need to sequence diligence earlier. Firms offering combined valuation-and-QoE packages say buyers now need enough time before closing to assemble monthly financials, bank statements, customer data and support for every proposed adjustment. (bpm.com) ### What happens next for the market? SBA’s notice says SOP 50 10 8.1 is effective October 1, 2026, and the agency’s document page lists version 8.1 as the current manual for 7(a) and 504 lenders. In the run-up to that date, lenders, borrowers and diligence providers are using the new guidance to set report scopes, underwriting standards and closing timelines for covered acquisition financings. (sba.gov 1) (sba.gov 2) (ampbusinessvaluations.com)