Do You Need a Quality of Earnings Report to Sell Your Business?

A seller does not need a quality of earnings report to sell a business, and no law makes one mandatory. If the buyer uses an SBA 7(a) loan and the business purchase price is $3 million or more, the buyer's lender must obtain one under SBA SOP 50 10 version 8.1, and that report cannot be prepared by or for the seller. What a seller can do is get the records ready that the report will test.

The rule is version-dated and applies to SBA-financed purchases only. A buyer paying cash or using a different lender sets their own diligence. Treat this page as a guide to the SBA case, and confirm the details with the buyer's lender.

What is a quality of earnings report?

A quality of earnings report is an independent financial due diligence report that examines the reliability, sustainability and accuracy of a business's historical and projected earnings. That is SBA's own definition in SOP 50 10 version 8.1, which took effect on October 1, 2026.

In plain terms, an outside accountant rebuilds the earnings from the money that moved through the bank, instead of taking the seller's profit and loss statement at its word. The result is one adjusted earnings figure the buyer and the lender can price and lend against. The SDE versus EBITDA guide explains the earnings measures such a report adjusts toward.

When does a buyer's lender have to order one?

An SBA 7(a) lender must obtain a quality of earnings report, on top of the business valuation, when two things are true. The deal is an Initial Acquisition or a Business Expansion, and the business purchase price is $3 million or more.

Three details decide whether a given deal crosses the line.

• The price is measured before financing. SBA sets the $3 million threshold before buyer equity, seller debt or any other financing source is applied. A large seller note does not bring a deal under it.
• Real estate comes out. The business purchase price is the price in the purchase agreement less the owner-occupied commercial real estate bought in the same deal, at its appraised value.
• An owner buyout is exempt. SBA does not require the report on Owner Buyout transactions, because the existing owners keep their operating knowledge. A sale to an outside buyer is the case that triggers it.

Under the previous version, SOP 50 10 version 8, which took effect on June 1, 2025, no quality of earnings report was required at all, so a deal that closed under that version may not be a guide to what a buyer's lender asks for now. The October 2026 rule changes post lists the other changes in the same update.

Can a seller's own report satisfy the lender?

No. SOP 50 10 version 8.1, Appendix 15, says the report "must be conducted for the benefit of the Lender" and that, because it is part of the buyer's financial due diligence, "the report must not be prepared by or for the seller."

A buyer may commission a report of their own before approaching a lender. The lender may then have it reviewed by one of the lender's approved vendors, and the review findings go into the loan file next to the original. The lender may not rely on a report prepared by another party without that review.

So a seller-commissioned report cannot be the required one. Whether a seller should pay for a separate review of their own books is a different question, covered below.

What will the report test, and what should a seller have ready?

SOP 50 10 version 8.1 tells the preparer what to do, which tells the seller what to prepare. Each requirement below paraphrases Appendix 15, paragraph C.1.

1. A cash proof. The preparer reconstructs cash receipts and disbursements by reconciling bank statement data to the income statement and the tax return. It must cover the trailing 12 months and the last two fiscal years. A business open under two years gets a reduced scope. Have ready: bank statements for every business account, the profit and loss statements for the same periods, and the filed tax returns, with every difference explained in writing.
2. A reconciliation of all the financial records. The preparer reconciles the accountant-prepared statements, tax returns, internal statements and IRS transcript data into a normalized earnings figure. Have ready: the internal reports you run the business from, since the buyer's accountant will compare them with the ones prepared for the tax return.
3. A documented list of add-backs and adjustments. The standard names non-recurring revenue or expenses, above- or below-market owner compensation, related-party transactions, deferred maintenance, and differences between cash-basis and accrual-basis reporting. Have ready: a schedule with one line per adjustment and the source record behind it. The add-back auditor keeps the bridge from reported to adjusted earnings in one place, and the seller's discretionary earnings guide explains which adjustments a buyer accepts.
4. An assessment of the revenue base. The preparer looks at customer concentration, contract continuity and whether existing revenue and margins are likely to hold after the sale. Have ready: revenue by customer for three years, and the contracts behind the largest accounts. The customer concentration post shows how a buyer reads that table.

The lender then uses the report's earnings, not the seller's, to calculate debt service coverage. If coverage does not support the valuation and the proposed debt, SOP 50 10 version 8.1 requires the loan amount to be reduced, and the buyer may fill the gap with additional equity.

A worked example with hypothetical numbers

This example is illustrative. The figures are made up and are not from a real sale.

A seller lists a landscaping company at $3,400,000, which includes $400,000 of appraised owner-occupied real estate. The business purchase price for SBA purposes is $3,400,000 less $400,000, or $3,000,000. That is at the $3 million line, so the buyer's lender must order a quality of earnings report.

The seller's profit and loss statement shows $2,410,000 of revenue for the last fiscal year. The cash proof finds $2,365,000 deposited in the bank. The $45,000 gap is December invoices that customers paid in January. The seller's books count them in the year billed, and the bank shows them a year later. Because the seller wrote that explanation beside the number before anyone asked, the preparer clears it in one pass.

Without the explanation, the same gap is an open question about every other number in the file. The effect on price is arithmetic. If the preparer lowers adjusted earnings by $50,000 and the buyer prices at three times earnings, the supportable price falls by $150,000. The multiple here is only for illustration. The valuation guide covers how multiples are chosen.

Had the real estate been priced at $500,000 instead, the business purchase price would have been $2,900,000, under the line, and the lender would not have been required to order the report. The independent business valuation would still apply, and the lender would still check the reported figures against the seller's tax returns.

Should a seller pay for their own review anyway?

That is a judgment call, not an SBA rule. The case for it is that a seller who finds the cash proof gap first can fix the books, write the explanation or adjust the asking price before a buyer's accountant finds it. The case against is cost, and the fact that the buyer's lender will not accept it in place of its own report.

A cheaper first step is to ask the company's own accountant to run the same bank-to-books-to-tax-return reconciliation for the trailing 12 months and the last two years, then list every difference. Ask for a written quote before hiring anyone, since fees vary with the size and condition of the records. None of this guarantees a sale or a price. Results vary. Nothing here is financial, legal, or tax advice.

What if the price is under $3 million?

The report is not required, but the diligence is not skipped. An SBA lender still needs an independent business valuation from an accredited qualified source, except that it may value the business itself when the business purchase price is $350,000 or less and buyer and seller are not closely related. If the amount paid exceeds the valuation, the difference has to come from the buyer's equity.

Lenders also check reported figures against the tax returns, often through IRS transcripts. The seller's due diligence checklist lists the full folder a buyer will ask for, in the order they will ask for it.

What should a seller ask the buyer or the lender?

Four questions, asked early:

• Is the loan an SBA 7(a) loan, and which SOP 50 10 version governs the application?
• Which transaction type has the lender assigned: Initial Acquisition, Business Expansion or Owner Buyout?
• What is the business purchase price after the real estate is removed?
• Is the buyer commissioning a report, or will the lender order one, and which periods will it cover?

Written answers let a seller schedule the bank statements and reconciliations before the clock starts. The sellability self-check shows where the evidence in a business is thin.