When a credit union finances a business acquisition through an SBA 7(a) loan, much of the credit decision comes down to one number: how much the business earns. That figure drives debt service coverage, the measure of whether a business generates enough cash to make its loan payments, and with it, how much the credit union can responsibly lend.
As of October 1, 2026, larger deals come with an independent check on that number. Under the Small Business Administration's (SBA's) updated Standard Operating Procedure, any SBA loan funded initial acquisition or business expansion with a purchase price of $3 million or more, not counting owner-occupied real estate, now requires a quality of earnings (QoE) report to verify whether the earnings a business reports reflect what it can reliably earn going forward. Owner buyouts and ESOP or cooperative conversions fall outside this requirement.
For large credit unions active in SBA lending, the goal is building a standalone "QoE-ready" workbook- addendum to the credit file, one designed so an independent reviewer can quickly and efficiently confirm the credit union's conclusions rather than extensively reconstruct them from scratch. The eight practices below show how to layout an organized QofE workbook.
1. Clearly Calculate and Support Add-Back Adjustments
Add-backs are adjustments to a business's reported profit for expenses that do not reflect how the business will operate under new ownership, such as a seller's personal vehicle or a one-time lawsuit. Most SBA files include a cash flow worksheet with a column of add-backs. Under a QoE standard, each add-back becomes its own documented adjustment, with a dollar amount, a description, a one-time or recurring classification, the source document, supporting evidence, and the analyst's conclusion.
Common adjustments include owner pay above or below market rate, personal expenses run through the business, one-time legal costs or repairs, pandemic-era impacts, rent paid to a related party, and income from outside normal operations. An organized workbook that arrives with supporting documentation eliminates much of the back-and-forth.
2. Reconcile Financial Statements to Tax Returns and IRS Transcripts
A business's tax returns and financial statements often show different profit figures. Underwriters can streamline this analysis by bringing those sources together into a single, supportable earnings figure. A detailed reconciliation along with supporting documentation in the QofE workbook does much of that work in advance by tying together:
- Revenue on the tax return, adjusted for differences between tax and accounting treatment, to revenue on the CPA-prepared financial statements
- Net income on the tax return, plus documented adjustments, to the normalized earnings figure used in underwriting, such as EBITDA or seller's discretionary earnings
Supporting notes should explain the usual causes of differences: cash versus accrual accounting, shareholder distributions, depreciation, timing differences, and inventory accounting. IRS tax transcripts round out the picture by confirming that the returns in the file match what the business filed. Remember, the QofE results should be GAAP based accrual vs. cash or other tax basis of accounting.
3. Assess the Quality of Revenue, Not Just the Trend
Traditional underwriting often asks whether revenue has grown. A QoE asks a harder question: will that revenue continue after the sale? The QofE workbook should answer it with written analysis in three areas:
- Customer concentration: the top 10 customers, each one's share of revenue, and whether any single customer accounts for more than 10, 20, or 30 percent of sales
- Contract durability: when key contracts expire, whether they renew, whether customers can terminate early, and how much contracted work remains
- Revenue stability: how much revenue repeats reliably versus one-off sales, seasonal swings, and dependence on a single owner, salesperson, or customer
4. Summarize Cash Activity
The new rule requires the QoE to include a proof of cash, which checks that the money a business reports receiving and spending matches what moved through its bank accounts over the most recent 12 months and the last two fiscal years. With a detailed bank account transaction history downloaded into excel, a simple bank activity summary gives the reviewer a head start, capturing the number of operating accounts, monthly deposits by account, major transfers between accounts, large or unusual transactions, and any non-business deposits the analyst excluded from revenue. Code and organize each transaction within the workbook according to its source to speed up the QofE review.
5. Document Related-Party Transactions
Related-party transactions are dealings between a business and its owners, their family members, or other companies they control. They are among the most common issues a QoE review uncovers, and SBA expects lenders to analyze and normalize them, adjusting each to market terms.
A dedicated section of the QofE workbook should address related-party rent, management fees, shared employees, family payroll, affiliate expenses, and common ownership arrangements. For each item, the analyst should record the current amount, the market amount, the proposed underwriting adjustment, and the support for that conclusion. Supporting documentation should be added to the Data File Room including legal agreements, board minutes and market comps when applicable.
6. Address Seller Dependency Directly
In many small businesses, the owner is the person customers call, the one who knows how the equipment works, and the one who brings in new work. A QoE reviewer will want to know whether earnings hold up once that person steps away.
The credit file should describe the seller's day-to-day role, the customer relationships and technical knowledge they hold, the planned transition period, and any employment or non-compete agreements. An owner-dependency score should be developed and supported along with a written conclusion on whether cash flow will hold after closing.
7. Data File Room: Keep Diligence Documents in One Indexed Place
Gathering documents is one of the biggest drivers of QoE cost and timeline. A single indexed folder, commonly referred to as a data file room, shortens the reviewer's work considerably. The folder is organized into six categories:
- Financial: tax returns, CPA-prepared and internal financial statements, general ledger, trial balances, bank reconciliations, and account statements
- Operational: customer and vendor reports, aging reports for receivables and payables
- Banking: bank and merchant statements, deposit summaries
- Legal: leases, contracts, franchise agreements, market comps, shareholder agreements
- Transaction Documents: Letters of Intent, Draft of Purchase and Sale Agreement, Employment Agreements
8. Close with a Readiness Check
Before the credit union engages the independent reviewer, a brief analyst certification should confirm:
- Has the analyst supported every add-back?
- Do the tax returns reconcile to the financial statements, and are IRS transcripts in the file?
- Does the QofE workbook document customer concentration, related-party transactions, seller compensation, and major contracts?
- Has the analyst identified unusual transactions and explained revenue trends?
- Does the debt service calculation tie to normalized earnings?
Where Audit and Risk Fit
These practices also give internal audit and risk teams ready-made criteria for loan reviews and SBA program audits. Two questions are especially telling: where the QoE adjusted earnings downward, did the loan amount, structure, or equity requirement change in response? And did the credit union engage the independent reviewer itself, rather than accept one supplied by the buyer, seller, or broker? The answers show whether the QoE functions as a genuine underwriting control or simply sits in the file to satisfy a checklist.
The Bottom Line
The most valuable change for credit unions is not performing the QoE in-house. It is producing a well-documented QofE workbook that shows exactly how the credit union arrived at the cash flow it underwrote. The reviewer can then confirm conclusions instead of recreating them, which means lower cost, faster turnaround, and a credit decision that holds up to scrutiny. Many credit unions will find it worth applying the same discipline to acquisition deals above roughly $2 million, so the transition is seamless when a deal crosses the $3 million threshold.
How ODC Helps Credit Union Lenders
As SBA transaction requirements continue to evolve, lenders need a QofE Workbook solution that is both compliant and practical. ODC helps lenders establish a turnkey framework for obtaining and documenting independent third-party QofE reviews, including process design, borrower guidance, documentation standards, QofE workbook structure with instructions and review protocols.
Beyond helping build the program, ODC can serve as the independent provider of the QofE itself, delivering timely, lender-focused analyses designed to support underwriting and expedite closing.
By combining process consulting with transaction execution, ODC provides a single resource to help large SBA lenders reduce administrative burden, accelerate deal flow, and improve consistency across their SBA portfolio. Whether you're preparing for your first deal under the new rule or bringing existing SBA files up to standard, reach out to the ODC team to start the conversation.
