The $3 Million Quality of Earnings Rule
Under SOP 50 10 8.1 this is Initial Acquisition. Down payment: 10%, cannot be reduced. Minimum debt service coverage: 1.25 to 1. Quality of earnings report: required. The seller after closing: consultant only, up to 24 months.
The deal
A buyer with no stake in the business agrees to buy it for $3,000,000, with no real estate in the deal. The buyer plans to put extra cash down and have the seller carry a note, so the SBA loan itself will be well under $3 million. The question is whether that changes the reports the lender needs.
- Who is buying: A new owner with no stake in the business today
- Business purchase price: $3,000,000
- Close relationship between buyer and seller: no
What SBA requires here
SBA category
Initial Acquisition
A new owner who was not already an owner or a 24-month employee: Initial Acquisition, the default category.
Quality of earnings report
Required
Required for Initial Acquisition and Business Expansion when the business purchase price is $3 million or more, measured before any equity or seller debt. The lender uses its earnings for the coverage test.
SOP 50 10 8.1, Appendix 15, Para. C.1 (Quality of Earnings)
| Down payment | 10%, cannot be reduced |
|---|---|
| What can count toward it | Half can be a seller note |
| Minimum debt service coverage | 1.25 to 1 |
| Business valuation | Independent valuation required |
| The seller after closing | Consultant only, up to 24 months |
| Loan term | Up to 10 years |
| Who signs the loan | You and the business, together |
| Collateral | Business assets, then personal real estate |
Each answer is explained, with its SOP 50 10 8.1 citation, in the structurer below.
What changes if one answer is different
The same deal at $2,950,000, run through the same rules.
| This deal | At $2,950,000 | |
|---|---|---|
| SBA category | Initial Acquisition | Initial Acquisition |
| Down payment | 10%, cannot be reduced | 10%, cannot be reduced |
| Minimum debt service coverage | 1.25 to 1 | 1.25 to 1 |
| Business valuation | Independent valuation required | Independent valuation required |
| Quality of earnings report | Required | Not required |
| The seller after closing | Consultant only, up to 24 months | Consultant only, up to 24 months |
| Loan term | Up to 10 years | Up to 10 years |
| Who signs the loan | You and the business, together | You and the business, together |
Change the answers
The structurer below is loaded with this deal. Change any answer to see how the SBA rules move. Open the full change of ownership calculator.
SBA category
Initial Acquisition
A new owner who was not already an owner or a 24-month employee: Initial Acquisition, the default category.
- Down payment
- 10%, cannot be reduced
- What can count toward it
- Half can be a seller note
- Minimum debt service coverage
- 1.25 to 1
- Business valuation
- Independent valuation required
- Quality of earnings report
- Required
- The seller after closing
- Consultant only, up to 24 months
- Loan term
- Up to 10 years
- Who signs the loan
- You and the business, together
- Collateral
- Business assets, then personal real estate
At least 10% of the total project cost: the price plus closing costs, the guaranty fee and any working capital, not the price alone. It cannot be reduced or waived.
SOP 50 10 8.1, Appendix 15, Para. C.2.a (Equity Requirements)
Cash that is not borrowed (including a gift) counts in full. A seller note or other debt on full standby (no principal or interest for the life of the SBA loan) and minority investors (under 20%, no control) can together cover no more than half.
SOP 50 10 8.1, Appendix 15, Para. C.2.a (Source of Equity Injections)
The business has to cover its debt payments 1.25 times, using the last fiscal year end or the average of the last two.
SOP 50 10 8.1, Appendix 15, Para. C.2 (Lender's Credit Analysis)
An independent valuation by an accredited Qualified Source, prepared for the lender (not for the buyer or seller). If the price is above the valuation, the difference has to be made up with equity.
SOP 50 10 8.1, Appendix 15, Para. C.1 (Business Valuation Requirements)
Required for Initial Acquisition and Business Expansion when the business purchase price is $3 million or more, measured before any equity or seller debt. The lender uses its earnings for the coverage test.
SOP 50 10 8.1, Appendix 15, Para. C.1 (Quality of Earnings)
The seller cannot stay as an owner, officer, director or employee, but the business can hire them as a consultant for up to 24 months in total.
SOP 50 10 8.1, Appendix 15, Para. A (Change of Ownership Requirements)
A loan that finances a change of ownership cannot amortize over more than 10 years, and cannot have a balloon. Only owner-occupied real estate bought in the same deal can go longer.
SOP 50 10 8.1, Appendix 15 (Loan Maturities)
A 7(a) loan cannot be made to an individual alone. A person buying 100% of the shares signs as a Co-Borrower with the business, jointly and severally. If a company you form buys the business, that company is the Borrower, with the business you buy as Co-Borrower if it stays a separate entity.
SOP 50 10 8.1, Appendix 15 (Types of Changes of Ownership)
The lender takes a lien on everything bought (vehicles have their own rule) and on the business's fixed assets. If they do not cover the loan, it must take available equity in personal real estate (home, investment property and other commercial property) solely owned by each Co-Borrower, owner of 20% or more and guarantor. Property with less than 25% equity is not required, and the lien can be limited to the shortfall.
SOP 50 10 8.1, Appendix 15 (Collateral)
Watch for
- Seller earnouts are prohibited. A working capital true-up at closing and rebates from the seller to the buyer are allowed.
SBA minimums from SOP 50 10 8.1 (effective October 1, 2026). Lenders can ask for more. General information, not a loan approval or legal advice. More SBA rules, answered.
Questions
What SBA change of ownership category is a $3 million business purchase?
Initial Acquisition. A new owner who was not already an owner or a 24-month employee: Initial Acquisition, the default category.
How much down payment does a $3 million business purchase need?
10%, cannot be reduced. At least 10% of the total project cost: the price plus closing costs, the guaranty fee and any working capital, not the price alone. It cannot be reduced or waived.
What debt service coverage does the lender need for a $3 million business purchase?
1.25 to 1. The business has to cover its debt payments 1.25 times, using the last fiscal year end or the average of the last two.
Does a $3 million business purchase need a quality of earnings report?
Required. Required for Initial Acquisition and Business Expansion when the business purchase price is $3 million or more, measured before any equity or seller debt. The lender uses its earnings for the coverage test.
Can the seller stay on after a $3 million business purchase?
Consultant only, up to 24 months. The seller cannot stay as an owner, officer, director or employee, but the business can hire them as a consultant for up to 24 months in total.
SBA minimums from SOP 50 10 8.1 (effective October 1, 2026), Appendix 15. Lenders can ask for more. General information, not a loan approval or legal advice.