DailyDime

The SBA may help finance up to $10 million of your acquisition. But the SBA will not check whether the seller’s EBITDA is real or not.

I’ve sat through due diligence from nearly every seat… selling a company I built, writing angel checks, and reviewing deals as a fund investor. The deals that went sideways shared one common thread, everyone admired the financials, but nobody checked the details.

On July 4, 2026, the SBA doubled its cumulative 7(a) and 504 loan limit from $5 million to $10 million, the largest financing package in the agency’s history. Bigger government-backed checks are now shopping for the same small businesses, while the earnings behind those price tags are still, mostly, whatever the seller’s tax returns say they are.

Enter the quality of earnings report, or QofE: part financial X-ray, part reality check. Here’s what it is, what it costs in 2026, what it finds, and when you can honestly skip it.

The SBA Increased Borrowing Limits

The alphabet soup matters. Under the new rule, a qualified borrower can stack up to $5 million through the 7(a) program with up to $5 million through the 504 program. The SBA pitched it at capital-intensive businesses in manufacturing, construction, logistics, energy, and food production. In practice, it also means acquisition entrepreneurs can now finance deals that were conventional-loan territory a year ago.

The leverage is generous. SBA acquisition loans require as little as a 10 percent equity injection, so a buyer can control a multimillion-dollar business with a comparatively thin slice of their own cash. That’s the appeal of buying a business instead of starting one, and I’m a fan of the math.

Now for the plot twist. The loan is guaranteed for the lender, not for you. If the EBITDA you underwrote turns out to be fiction, you still owe every payment, and you signed a personal guarantee saying so. The government protects the bank’s downside; a QofE protects yours.

What a QofE Actually Does

A quality of earnings report (QofE) is financial detective work on a target business, usually covering the last 24 to 36 months. It answers one question: are these earnings real, recurring, and sustainable? An analyst rebuilds the profit and loss statement from bank statements, invoices, payroll records, and merchant processor data. In other words: receipts, not vibes, and definitely not just the seller’s QuickBooks summary.

The report puts every seller add-back under a bright light, separates one-time revenue from recurring revenue, traces how cash actually moves through the business, and flags customer concentration. It also establishes a normalized working capital figure, so you know how much cash the business needs on day one. The prize is an adjusted EBITDA number you can underwrite without crossing your fingers.

Two things a QofE is not. It’s not an audit, because auditors opine on whether financial statements follow GAAP, and most small businesses aren’t even trying to follow GAAP. It’s not a valuation either, since a valuation tells you what the business is worth assuming the numbers are true. The QofE tests whether they’re true, which is a different job entirely, and in my experience the more important one. If you want the multiple side of the equation, I covered it in how to value a small business.

The Most Important Check Nobody Requires

A dangerous little myth costs first-time buyers real money: “the bank’s required valuation already checks the numbers.” Spoiler: it does not.

It doesn’t, and the SBA’s own rulebook says so. Under SOP 50 10 8, effective June 1, 2025, an SBA lender financing a change of ownership must obtain an independent business valuation whenever the amount financed, minus the appraised value of real estate and equipment, exceeds $250,000. Since goodwill is the bulk of almost every service-business deal, that independent valuation is effectively mandatory for ETA buyers.

That valuation typically costs $2,000 to $7,000, and the lender orders it to satisfy the SBA, not to protect you. Think of it as a math test with the inputs already filled in. The appraiser takes the seller’s tax returns and financials largely at face value, applies accepted methods, and asks, “is the price reasonable if these numbers are accurate?” Nobody in that process is matching invoices to bank deposits. Nowhere does the SOP require a quality of earnings report; the QofE is a market practice buyers choose for protection, not a compliance box someone else checks for them.

Three documents walk into an SBA closing. Only one asks whether the seller’s earnings are real. Here’s the honest breakdown:

That middle column deserves a second look. Every document in the SBA closing stack exists because a rule requires it, except the one that tests whether you’re buying real earnings. Nobody sneaks that one into your closing binder. It is on you.

What the Reality Check Costs in 2026

Nobody enjoys adding another five-figure line item to deal costs, but pricing follows deal size and complexity. For lower-middle-market deals, boutique CPA-led firms charge roughly $5,000 to $20,000 on a flat-fee basis, with some specialists quoting $6,000 to $12,000. Scaling up by target size, expect $10,000 to $25,000 for a business under $1 million in EBITDA, $25,000 to $50,000 in the $3 million to $10 million EBITDA range, and $50,000 to $75,000 or more above that.

The Big Four will run the same engagement for three to five times boutique pricing. At this deal size, much of that premium buys institutional process, brand comfort, and very expensive letterhead. Timing matters too: standard turnaround at boutique firms is two to four weeks, and rushing it inside seven business days adds a 25 to 50 percent premium. Larger or messier engagements run four to eight weeks, so order early in the LOI window, not after your lender starts sending emails in all caps.

Is it worth it? The spreadsheet gets persuasive fast. The table applies a modest 15 percent earnings overstatement, which is tame compared with what these reports routinely find, across three deal sizes:

Notice the pattern: as deals get bigger, the QofE fee shrinks as a percentage of price while the downside grows in dollars. It is like paying less for the umbrella as the storm gets bigger. The new SBA limit pushes buyers up that table, exactly where the report gets cheaper relative to the risk.

What the Financial Detective Usually Finds

Here is the movie version, using a composite that mirrors deals I’ve seen. A buyer is under LOI on a service business at 3.5x the seller’s stated $700,000 EBITDA. The price is $2.45 million, the down payment is $245,000, and everyone is smiling. Then the QofE comes back at $470,000 adjusted EBITDA.

There was no mustache-twirling fraud. The seller ran personal vehicles through the fleet, paid family members above market, recognized prepaid annual contracts as revenue the day the check cleared, and buried a one-time legal settlement in operating expenses. His books were optimized for taxes, like almost every small business’s books. Taxes reward looking poor; a sale rewards looking rich. The accounting got caught in the costume change.

At the same 3.5x multiple, the real business is worth about $1.65 million. The report just saved the buyer roughly $805,000, more than three times the entire down payment, for a fee around $15,000. That is roughly a 54x return on the diligence spend. The loan payments, remember, still come out of the $470,000 of real cash flow.

Add-backs are where most of this fight happens, and I wrote a full breakdown of which EBITDA add-backs buyers accept and reject. The other quiet killer is the working capital peg, because a business that looks profitable can still arrive cash-starved if the seller drains receivables before close. Some companies even run on negative working capital, which is a feature when you understand it and a trap when you don’t.

Buyers Are Not the Only Ones Who Get a QofE

The QofE is not only a buyer’s weapon. A sell-side QofE, ordered before the business goes to market, runs $30,000 to $100,000 and takes four to eight weeks. That sounds steep until you see what it does: it finds problems while you can still fix them, documents your add-backs with evidence, and takes away the buyer’s favorite late-game play, the price re-trade.

Sellers who show up with a credible sell-side report keep negotiating leverage through diligence instead of surrendering it. The alternative is watching a buyer’s QofE shrink your EBITDA at the closing table, then offering an earn-out to paper over the gap. I’d rather spend the money early and defend one set of numbers than negotiate against two.

Investors should care for a different reason. If you’re backing a searcher or co-investing in an acquisition, the QofE is the first document to request, full stop. It belongs on your due diligence checklist right next to the cap table, because your equity sits behind the SBA debt and eats the first dollar of any earnings shortfall.

When You Can Keep the Checkbook Closed

Honesty requires saying the QofE isn’t sacred. On very small deals, say a $150,000 asset purchase where you can personally verify the revenue in a weekend, a $10,000 report is a poor trade. The same logic applies when the price is mostly appraised hard assets, because in an asset purchase built on equipment and inventory, the appraisals carry the load and goodwill is a rounding error.

There is a QofE Lite option too. Several boutique firms offer scoped-down financial diligence, sometimes called a proof of cash, for a few thousand dollars. You get bank-statement verification of revenue without the full add-back and working capital analysis, and on a small, clean deal that may be plenty.

My line is simple. Once goodwill is the majority of the price, or the deal requires a personal guarantee on six-figure debt, the full report stops being optional. Both describe nearly every SBA acquisition worth doing. At that point, “trust but verify” is not cynicism. It is debt service.

Your Move: Buyer, Seller, or Investor

If you’re buying: put the QofE in the deal budget before the first LOI draft, and get quotes from two boutique providers before your lender asks. Order it as soon as the LOI is signed. Two to four weeks fits inside a 90-day close only if the clock starts early.

If you’re selling: commission a sell-side QofE, or at minimum conduct a rigorous internal scrub of your add-backs, 12 to 18 months before you go to market. Every dollar of EBITDA you can defend with documents is worth a multiple of that dollar at close. Bring receipts before the buyer brings a magnifying glass.

If you’re investing: make the QofE a condition of your check on any acquisition deal. If a searcher balks at spending 0.7 percent of the purchase price to verify the earnings, that tells you plenty about how they may steward the other 99.3 percent.

Washington just brought a bigger checkbook to the small-business acquisition market. It still did not bring a receipt checker.

The SBA can guarantee the loan. It cannot guarantee the story behind the earnings.