SBA rules · SOP 50 10 8.1
When does an SBA loan require a quality of earnings report?
A Quality of Earnings (QoE) report is required for 7(a) change of ownership loans involving a Business Expansion or Initial Acquisition when the Business Purchase Price is $3 million or greater.
Quoted from SBA SOP 50 10 8.1Every quote checked word for word
In detail
- Transaction threshold: For Initial Acquisition and Business Expansion transactions, a QoE report is required when the Business Purchase Price is equal to or greater than $3 million, determined before the application of buyer equity, seller debt, or other financing sources. When commercial real estate is included in the acquisition, the appraised value of the real estate is deducted from the purchase contract price to determine the Business Purchase Price.
- Exempt change of ownership types: Owner Buyout and ESOP & Cooperative transactions are exempt from the QoE requirement because the existing owner(s) retain operational knowledge and the transaction does not alter the management or operating structure.
- Special Purpose Property exemption: A QoE report is not required for a transaction involving the acquisition of an owner-occupied Special Purpose Property, regardless of the Business Purchase Price.
- Report and provider standards: The QoE must be performed by an independent, experienced financial professional for the benefit of the Lender, must include a Cash Proof, and cannot be prepared by or for the seller. If a buyer commissions their own QoE, the Lender cannot rely upon it without an independent review performed by one of the Lender's approved vendors.
- Other loan programs: The SOP does not require a QoE report for 504 loans or for 7(a) loans that do not involve a qualifying change of ownership.
The source
What the SOP says
“For Business Expansion and Initial Acquisition transactions where the Purchase Price as defined in Paragraph A.1 is equal to or greater than $3 million, the Lender must also obtain a Quality of Earnings (QoE) in addition to the required Business Valuation. The $3 million threshold is determined before the application of buyer equity, seller debt, or other financing sources. Owner Buyout and ESOP & Cooperative transactions are not subject to the QoE requirement because the existing owner(s) retain operational knowledge of the business and the transaction does not result in a change to the management or operating structure.
“A QoE analysis is a financial due diligence report that examines the reliability, sustainability, and accuracy of a business's historical and projected earnings. The QoE must be performed by an independent, experienced financial professional and must be conducted for the benefit of the Lender. As the QoE report is part of the financial due diligence of the transaction, the report must not be prepared by or for the seller.
“The Lender may not rely upon a QoE report prepared by another party without a review being performed by one of their vendors.
“A Quality of Earnings report is not required for a transaction involving the acquisition of an owner-occupied Special Purpose Property, regardless of the Business Purchase Price.
“When real estate is part of the acquisition, the Lender must remove the appraised value of the real estate from the price set by the purchase and sale agreement to determine the Business Purchase Price for purposes of financial due diligence requirements set forth in this Appendix.
Have a deal in mind?
Tell us about it and we will tell you how these rules apply, and which lenders finance deals like yours.
More on buying a business
Are earnouts allowed in an SBA business acquisition?Can an SBA loan be used to buy a franchise?Can an SBA loan pay for goodwill?Can a seller note count toward the SBA down payment?Can the seller stay on after an SBA business acquisition?Does SBA require a business valuation to buy a business?All SBA rules
Related reading
Why the SBA's New Partial Buyout Rules Actually WorkPartner Buyout Financing: How It WorksHow to Finance the Purchase of an Existing Business: The Real-World Guide
This page quotes the SBA's Standard Operating Procedure 50 10 8.1. Lenders can ask for more than the SBA minimum. It is general information, not a loan approval or legal advice.