SOP 50 10 8.1 applies to SBA 7(a) applications received from today. Two weeks ago I wrote that on Initial Acquisition and Business Expansion transactions with a business purchase price of $3 million or more (Owner Buyout and ESOP and Cooperative transactions are exempt from the QoE requirement), the lender must obtain a Quality of Earnings report, the borrower pays for it, and, for delegated lenders, the engagement letter has to be in place when the loan number issues. All of that is still true. On September 25, four days before the effective date, SBA reissued the SOP with technical updates (Information Notice 5000-882227), and one paragraph in Appendix 15 changed who can start the report. This issue is that paragraph, what it does to a deal, and what it means for each side of the table.

The report still "must be conducted for the benefit of the Lender" and "must not be prepared by or for the seller." What is new is the buyer's report. A lender that receives a QoE the buyer commissioned may use it, but the text is precise about how: the lender "may not rely upon a QoE report prepared by another party without a review being performed by one of their vendors," and the findings of that review go into the loan file with the original report.

So the buyer can now commission the report where it is most useful, before the letter of intent or early in exclusivity, and carry it to the bank. The bank cannot simply accept it. One of the bank's approved vendors reviews it against the Appendix 15 scope, writes up the findings, and the two documents sit together in the credit file. A reliance letter from the buyer's provider to the lender makes the report something the lender is permitted to rely on; the vendor review is what the SOP body requires before it does. One honest note: SBA's Information Notice summarizes the path as a reliance letter or a secondary review by a different firm, while the SOP text itself requires a review by one of the lender's vendors before reliance. Until SBA says otherwise, the conservative reading is that the review is required, and that is how counsel has advised us to proceed.

Two smaller changes in the same reissue matter for deal structure. Working-capital true-ups in the purchase agreement are not treated as seller rebates, and the cash may be retained by the borrower. And 7(a) Small and SBA Express loans may now finance changes of ownership under the same Appendix 15 framework, with the same coverage test.

Before September 25, the sequence was fixed: the lender engaged the provider at loan-number issuance, the report arrived weeks later, and the buyer learned what survived after exclusivity had mostly run. The buyer paid for a report he did not choose and did not see until it was already in the credit file.

Now the buyer can run the test first. If the seller's $1,349,772 becomes $1,118,468 under a proper review (the composite deal in Issue 2), the buyer knows that before the price is set, not after. The offer is written on the surviving number. The lender receives a report scoped to Appendix 15 with reliance extended, sends it to its vendor for review, and the review confirms the scope and the findings. Nobody orders a second report on the buyer's clock.

That only works if the buyer's provider did two things from the start: scoped the report to Appendix 15 (the cash proof for the trailing twelve months and each of the last two fiscal years, tax return and transcript reconciliation, add-backs tested against the bank data, related-party items, concentration and contract continuity), and agreed in writing to extend reliance to the lender. A report scoped as a buyer's tool, with the usual non-reliance language, will not pass the vendor review, and the buyer pays twice.

Ask two questions before engaging any provider: is this scoped to Appendix 15, and will you extend reliance to my lender in writing. If either answer is no, the report is yours and the bank will order its own. Commission early. The number you underwrite at the letter of intent should be the one that survives the review, because from today it will be reviewed.

The vendor review is now a step on every file where the buyer arrives with a report, and it is the same procedures on someone else's work: scope mapping, cash proof, add-back re-performance, reconciliation, a documented conclusion. Your approved-vendor list needs at least one firm that can do that quickly, and the reviewing firm cannot be the one that wrote the report. Deals where no buyer report exists are unchanged: you commission, the borrower pays, the letter is in place at the loan number.

The add-back schedule now gets tested before the offer, not after. A schedule that survives a bank's review is worth more than one that reads well, and the way to know which you have is to run the test yourself, eighteen months out if you are an advisor, before listing if you are a broker. The three habits from Issue 2 are where most schedules fail: the "one-time" expense that recurs in the bank data, the owner who works for free, and the related-party lease carried at market when it is not.

The $3 million threshold. The coverage standards: 1.25 to 1 on Initial Acquisition, Owner Buyout, and ESOP transactions, 1.15 to 1 on Business Expansion, on historical earnings, with projections evaluated but not relied on, except for an owner-occupied Special Purpose Property acquisition that the appraised value fully collateralizes, where the SOP permits reliance on projections. The engagement-at-loan-number requirement for delegated lenders. The rule that a report prepared by or for the seller does not count, in either path. And applications received through yesterday remain under the prior SOP.

Issue 3, on October 13, is how a Main Street deal actually dies between the letter of intent and the credit desk, and who is standing at each step.

Gray

Workup is the analyst's read on small business acquisition: pre-LOI screens and full diligence for buyers, reliance letters and vendor reviews for lenders, and the Quality of Earnings the SBA now requires on acquisitions over $3 million. Findings and implications, in five business days. getworkup.ai

Gray F. Smith spent twenty years as a senior portfolio manager at some of the largest global hedge funds, including Millennium, Caxton, and J. Goldman, before founding his own fund, Franklin Street Capital Partners. A Harvard economics graduate and Institutional Investor Hedge Fund Rising Star, he is the founder of Workup, bringing institutional-grade diligence to small business acquisition. Learn more at getworkup.ai.