Before I get into it, one quick note.

Now, onto the newsletter.

The SBA's October 1 technical corrections allow a lender-approved vendor to review a Quality of Earnings (QoE) report commissioned by the buyer. Buyers who have already paid for diligence may be able to avoid commissioning a second full report.

In September, I wrote about the original SOP language restricting reports prepared for the borrower. But the corrections change how an existing buyer report can be handled.

The bank still has to accept the provider, scope, and review arrangement, and the earnings findings can change how much debt it will finance.

What the correction allows

The corrected full SOP recognizes that a buyer may commission a QoE before approaching a lender. The bank may have an approved vendor review that report and retain both the original report and the review findings in its loan file.

SBA's short technical-update notice describes using an existing buyer report with a reliance letter or a secondary review by another firm. The full SOP specifies a lender-approved vendor review. A reliance letter lets the bank rely on a report under the provider's terms, but buyers should not assume that letter alone satisfies the bank's acceptance requirements.

Get the lender's required process in writing before counting on reuse. Ask what additional work or review fees will be needed, so you can budget for the accepted scope.

Before signing the engagement letter, send the bank the proposed scope and the provider's credentials. If a report already exists, send its completion date and table of contents. I would ask the bank to identify who will perform the secondary review, what that review will deliver, and whether the reviewer needs access to the underlying schedules.

Confirm who pays for updates if the lender requests additional work. A report completed several months ago may leave a gap between the period reviewed and the business you are actually buying. Ask how the provider will explain recent results and any material changes before closing.

The required report must be independent and prepared for the lender's benefit. A report prepared by or for the seller remains prohibited for this purpose.

The threshold follows the business price

For Initial Acquisitions and Business Expansions, a QoE is generally required when the business purchase price is $3 million or more. The threshold is measured before buyer equity, seller financing, or other funding reduces the SBA loan request. Owner-occupied commercial real estate is removed from the calculation at its appraised value.

A $3.4 million business still crosses the threshold if the seller carries a $600,000 note. Borrowing less does not change the price of the business you are buying.

Some owner buyouts and qualifying special-purpose-property acquisitions follow different rules. Confirm the transaction category with the lender. Below the SBA threshold, ask what diligence the bank requires under its own credit policy.

The corrected SOP applies to applications received by SBA on or after October 1, 2026. For a deal already in the pipeline, have the lender confirm the governing version. The closing date alone does not determine it.

What the report has to establish

A QoE examines whether reported earnings are supported by the records and likely to continue after the sale. Under the SOP, the analysis must reconcile accountant-prepared statements, internal financial statements, tax returns, and IRS transcript data to establish normalized earnings from recurring operations.

One required component is cash proof. The provider reconstructs cash receipts and disbursements from bank statements and reconciles them with the income statements and tax returns. The required periods are the trailing 12 months and the last two fiscal years. For a business operating less than two years, the review covers its available operating history.

Check whether an existing report covers those periods and reconciliations before submitting it for acceptance.

Trace the deposits to the work performed

A bank deposit tells you that money arrived. I would want the provider to explain what generated it and whether it belongs in the earnings period under review. Transfers between accounts, loan proceeds, and customer payments do not have the same meaning. Ask for a clear reconciliation of the differences between deposits and reported revenue, rather than treating a matching total as the end of the review.

Suppose a contractor receives an $80,000 deposit in December for work scheduled in January. The cash is real, but the treatment of revenue depends on the accounting basis and the work performed. Ask the provider to trace the payment to the contract, invoice, and related job costs. If the buyer must complete that job after closing, the model needs to reflect the spending still ahead.

That finding also belongs in the transaction discussion. Have your advisers explain how customer deposits and unfinished work will be treated at closing. You need to understand which obligations you are accepting and whether the corresponding cash stays with the business.

Check each earnings adjustment

Add-backs are adjustments to reported profit intended to show earnings under normal operations. Check whether each expense actually disappears under your ownership. If the seller performed work you must hire someone to do, removing the seller's compensation without accounting for replacement cost can overstate earnings.

Consider a hypothetical business in which the seller's role costs $100,000 a year in the current accounts. If a replacement manager would cost $120,000, the relevant adjustment reduces earnings by $20,000. Adding back the full $100,000 would miss the cost of keeping the business running. The same question applies to family members on payroll, unusually low rent, or insurance that will cost more under a new owner.

For each adjustment, I would want the amount, the supporting record, the reason it changes, and the expected cost after closing. Label estimates clearly so everyone can distinguish a documented adjustment from a buyer's operating assumption.

The report also examines customer concentration, contract continuity, and whether revenue and margins are sustainable. Even with acceptable earnings, a customer loss or overlooked operating cost can make the acquisition less attractive.

Measure the profit tied to each major customer

A customer's share of revenue can understate its importance to profit. Consider a hypothetical business with $5 million in annual revenue and $1 million in gross profit. One customer produces $1 million of that revenue and $400,000 of gross profit. That customer represents 20% of sales but 40% of gross profit before overhead. Losing it would leave a much larger hole than the revenue percentage suggests.

Ask for customer-level revenue and gross profit by month, where the records support it. Then examine the relationship behind the numbers. Is the work governed by a recurring contract, a sequence of purchase orders, or the seller's personal relationship? Who controls renewal, and what evidence supports the seller's expectation that the work continues after the sale?

I would also ask the provider to help separate direct costs that fall with lost sales from expenses that remain. Run a case in which the largest customer's purchases decline by 25%. Reduce costs only where the business can actually avoid them, and show the resulting effect on profit and cash. This gives you a reasoned basis for discussing the price, the transition plan, and the amount of exposure you are willing to accept.

Read past the headline earnings number

Ask the provider to walk you from the seller's claimed earnings to the report's conclusion. Which adjustments were accepted? Which were rejected? Which still depend on an explanation or missing records?

Then separate what changes the price from what changes your operating plan. A one-time job may explain unusually strong revenue. A customer contract approaching renewal may require a retention plan. Deferred maintenance may create a cash expense shortly after closing. Those findings deserve a place in your model and your first-year budget, even when the final earnings number clears the bank's coverage test.

Check the cash needed to operate

An acceptable earnings number does not tell you how much cash the business needs on day one. Customers may pay weeks after you incur payroll. Inventory may need to be purchased before the sale produces cash. Those timing differences can leave a profitable company short of money.

Ask what balance-sheet and working-capital analysis is included in the engagement. Review overdue receivables, slow-moving inventory, and the timing of supplier payments. Then compare those findings with the working capital the seller will deliver and the cash provided in your financing plan. A lower price helps the acquisition economics; it does not automatically fund the operating cash gap.

Look at monthly balances as well as annual averages. A company that builds inventory ahead of its busy season may need its largest cash cushion just when you take over. A receivable listed at its full amount may be slow to collect, disputed, or tied to unfinished work. Ask the provider to explain what is collectible and what additional spending is needed to collect it.

Separately, review bills the seller has postponed paying. Then have your accountant and transaction attorney help define the working capital delivered at closing and how a shortfall or surplus will be measured. Compare that definition with the cash forecast you will actually use to run the company.

How an earnings adjustment changes the financing

The lender must use the QoE earnings in its debt-coverage analysis. Consider a hypothetical Initial Acquisition in which that analysis initially supports $600,000 of cash flow available for debt service and $480,000 of annual debt payments. Coverage is 1.25 times, the SOP minimum for a typical Initial Acquisition.

Suppose diligence shows that a $60,000 add-back is an expense that will continue after closing. The lender revises available cash flow to $540,000. With the same $480,000 payment, coverage falls to about 1.13 times.

To restore 1.25 coverage, annual debt service must fall to $432,000: $540,000 divided by 1.25. You now have a $48,000 annual payment reduction to solve.

That may require more equity, less debt, a lower price, or a different permitted seller-note structure. The additional cash needed depends on the interest rate, repayment schedule, and other debt. It is not simply the $60,000 earnings adjustment.

For a typical Initial Acquisition, projected growth after closing cannot replace the required historical cash-flow support. Don't assume the bank can use future improvements to cure today's financing shortfall.

Valuation creates a separate constraint. QoE examines the earnings; valuation supports the price. If the price exceeds the supported valuation, the difference requires additional equity. Total acquisition debt, including seller debt that is not on full standby, must fit within the supported value and repayment capacity. Full standby means no principal or interest payments for the term of the SBA loan.

The buyer-report flexibility applies to QoE. The required business valuation must still be requested by and prepared for the lender.

Bring evidence to the seller conversation

If diligence changes the financial picture, identify the specific finding before proposing a new price. Was an expense misclassified? Did a non-recurring contract inflate earnings? Or are records still missing? An unresolved question should lead to a request for evidence, not an immediate assumption that the seller's number is wrong.

Give the seller and their accountant a clear list of the records or explanations needed. Once the provider resolves the issue, show how the accepted earnings affect your offer and financing. Run any revised price, equity contribution, or seller-note terms through the lender's model before treating the funding gap as solved.

I would keep a short findings log during diligence. For each open item, identify the dollar amount, the evidence still needed, who is responsible for answering it, and the decision it could change. Give the lender the updated earnings schedule when an issue is resolved, rather than waiting for the last week before closing.

If the debt amount changes, update the cash you must bring, the seller's proceeds, and your operating reserve together. A revised purchase price can look attractive while still leaving you short of cash. Resolve that mismatch in one complete financing model before agreeing to revised terms.

Why timing differs between lenders

Our lender conversations this past week showed different approaches. Some banks will discuss preliminary terms while the QoE runs alongside final underwriting. Others want more diligence completed first. The buyer's experience and familiarity with the business can affect the sequence.

Ask whether the bank can obtain an SBA loan number while the reports are underway. Under delegated Preferred Lenders Program authority, it may finish and review the required QoE and valuation after the number is issued, but before closing. The providers must already be formally engaged when the number is issued, and the bank must update its credit analysis for the findings. When a bank submits the application to SBA for nondelegated processing, the required reports accompany that application.

A term sheet or an SBA loan number does not settle the final earnings, valuation, or financing structure. Ask what remains conditional before promising the seller a closing date.

The provider's timetable also depends on when the seller delivers usable records. Confirm who will supply bank statements, tax returns, detailed accounting records, and explanations of adjustments, and when. Put that schedule alongside the bank's approval milestones in your diligence plan.

What I would settle before paying for a report

I would put the proposed engagement in front of the lender and get written answers to five questions:

1. Will you accept this provider and, if the report is already completed, what vendor review or reliance documentation will you require?

2. Does the scope cover the required cash proof, historical periods, reconciliations, and earnings adjustments? What additional work or fees should I expect?

3. When must the providers be engaged and the reports completed, and which financing decisions remain conditional until then?

4. Will I receive the full report and be able to discuss the findings directly with the provider?

5. If the accepted earnings or valuation are lower than the deal assumes, how will we revise the debt, equity, and purchase structure?

Also ask how to document eligible report expenses. The SOP permits applicant funds spent on financial-diligence reports to count toward the equity injection. Confirm the lender's documentation requirements; this does not lower the required injection percentage or make every advisory fee eligible.

Agree on the engagement, seller records, and financing timetable before spending money. Then use the findings to resolve any gap in price, debt, or equity while there is still time to negotiate.

Read the SBA technical update notice.​
​

Thanks for reading!

If you're working on an acquisition, or are in the pre-LOI phases, you can book a short, informal call here to meet our team and learn how we can help you.

For pre-LOI buyers ready to explore opportunities: Schedule a meet & greet call​

Already have a deal under LOI and need financing help: Schedule an LOI consultation​

Independent sponsors on a non-SBA deal (pre-LOI): Schedule a financing call with Rafael​

Independent sponsors with a deal under LOI: Schedule an under-LOI call with Rafael​

Until next time,

Matthias Smith

President, Pioneer Capital Advisory

​www.pioneercapitaladvisory.com​
​

Disclaimer: The information in this newsletter is for informational purposes only and should not be considered legal or financial advice. Business buyers are encouraged to consult with their legal counsel and accountant to ensure the proper structuring of their transactions and to fully understand the tax implications of seller financing.

Thanks for reading. Feel free to reply directly to this email with any questions or thoughts.