Published by Evolution Capital | IT/Telco M&A Specialists | 25 Years | 250+ Transactions
Evolution Capital · 25 Years · 250+ Deals
America Just Made Quality of Earnings Mandatory. Should UK Lenders Care?
Published by Evolution Capital | IT/Telco M&A Specialists | 25 Years | 250+ Transactions
25+
Years in technology M&A
250+
Transactions
$1bn+
In completed transactions
Evolution Capital · 25 Years · 250+ Deals
From 1 October 2026, certain US government-backed acquisition loans above $3 million require an independent Quality of Earnings report, prepared for the lender, not the buyer. The UK has no equivalent rule. But the question behind it is universal, and worth asking now: should a lender shape and engage in the earnings validation process itself, or simply review someone else’s finished report?
Evolution Capital · From the trenches
- At a Glance
What You'll Learn.
01
What the SBA Has Changed in the US, and Why
02
What the SBA Is Asking Lenders to Establish
03
Why This Matters for Acquisition Finance
04
What About the UK?
05
Why Buyers Should Care Too
06
What This Means for Lenders
07
How Evolution Capital Can Help
From 1 October 2026, certain US Small Business Administration-backed acquisition loans with a business purchase price of at least $3 million will require an independent Quality of Earnings report prepared for the lender’s benefit and used directly in underwriting.
That rule does not apply in the UK.
But this is not really an article about American lending regulation. It is about a more fundamental question that sits behind it: what evidence should a lender require before lending against EBITDA? And how early should UK lenders be shaping that evidence, rather than simply reviewing the output?
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What the SBA has changed in the US, and why
The SBA’s Standard Operating Procedure 50 10 8.1 takes effect on 1 October 2026. For qualifying Initial Acquisition and Business Expansion transactions with a business purchase price of at least $3 million (measured before buyer equity, seller financing or other funding is applied), the lender must obtain a Quality of Earnings report. It must be prepared independently for the lender’s benefit, not the buyer’s. It must be used in underwriting, including in the debt-service coverage calculation. And it is separate from, and additional to, the independent business valuation also required on covered transactions.
The prescribed minimum procedures include reconciliation of financial information across multiple sources: accountant-prepared financial statements, tax returns, management accounts and IRS transcript data. A mandatory Cash Proof reconciles cash receipts and disbursements reflected in bank statements against the accounting records and tax returns, for the trailing twelve months and the prior two fiscal years. The report must identify and evidence add-backs and adjustments, assess revenue sustainability and customer concentration, and produce a normalised earnings figure that the lender actually uses.
The SBA has not published a detailed cost-benefit analysis or consultation record explaining precisely why the $3 million threshold was chosen, or why the Cash Proof covers three years rather than two. But the direction is clear: for these acquisitions, the SBA is putting materially greater weight on independently assessed historical earnings and cash evidence, rather than allowing the financing case to rest primarily on seller-adjusted EBITDA or forecast performance.
The rule also formalises something that was already happening selectively. Before SOP 50 10 8.1, sophisticated lenders sometimes required independent QoE or enhanced FDD on larger or riskier acquisition loans. The new rule standardises that practice and removes lender discretion on qualifying transactions. It is less a new concept than a mandatory floor.
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What the SBA is asking lenders to establish
Beneath the procedural detail, the requirement is asking four questions. They are not new questions. Formalising them as mandatory lender diligence, rather than optional practice, changes how seriously they get answered.
Are the earnings real and sustainable?
Management-adjusted EBITDA is a starting point. Add-backs need to be evidenced and genuinely non-recurring. Related-party transactions need to be at arm’s length. Owner compensation needs to be normalised. The lender QoE tests whether the reported earnings are real before sizing the debt against them.
Can the adjustments be supported?
The quality of EBITDA add-backs varies enormously. Some are clean and documented. Others are optimistic, poorly evidenced, or look non-recurring but have a habit of repeating. A lender-focused QoE interrogates those adjustments independently and through the lens of debt serviceability, rather than simply asking whether they are reasonable for transaction valuation purposes.
What sits underneath the revenue?
EBITDA is a function of revenue and costs. Its sustainability depends on whether the revenue base is stable, contractually supported and not subject to material concentration risk. Customer concentration, contract tenure, churn rates, pricing dynamics and margin sustainability all sit here.
Does it become cash?
Working capital consumption, maintenance capex, tax payments and cash collection timing all sit between reported EBITDA and actual cash available to service debt. At three times leverage, the distinction between EBITDA and free cash flow matters enormously.
These four questions build on each other: reported earnings, then sustainable earnings, then cash, and ultimately debt service.
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Why this matters
That framework is not academic. It decides how much a transaction can actually be financed for.
A £300,000 unsupported add-back is not necessarily a £300,000 problem. At three times leverage, it becomes a £900,000 financing problem. That determines whether a transaction can be financed as structured, whether more equity is needed, whether the seller takes back paper, or whether the deal needs repricing. That is a financing conversation you want to have before the deal is agreed, not afterwards.
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What about the UK?
Not necessarily the same rule, but the same question is still worth asking, and worth asking now.
There is no equivalent mandatory requirement in the UK, and I am not aware of any direct movements toward one. But the absence of a rule doesn’t mean UK lenders can’t get the same comfort in their lending book that SOP 50 10 8.1 is designed to mandate. It just means getting there is a matter of practice rather than compliance.
UK lenders already use the buyer’s FDD extensively in acquisition finance (as well as any VDD, where one exists), and the scope and depth of that work quite properly varies according to the transaction, its risk, and the needs of the parties involved. FDD can be, and often is, prepared on a basis that benefits debt or equity finance providers, practitioners can extend a duty of care to new finance providers, and financing banks often request direct discussions with the FDD practitioner during the process. In practice, though, a lot of these reports are shared with lenders on a hold-harmless basis, which can reduce or remove the reliance the lender actually has. So it isn’t that UK lenders never receive reliance or never engage with FDD providers. It’s that the basis on which they receive the work, and how early they get involved in shaping it, varies a great deal from deal to deal.
What actually matters is whether that engagement happens early enough. Reliance on a finished report, or a single conversation with the practitioner near the end of the process, still means inheriting a scope someone else set: the risks that shaped the analysis were the buyer’s, and the add-backs interrogated were the ones the buyer wanted to defend. A lender who is involved from the outset is in a different position. They can help shape the scope before work begins, raise questions while the data is live and the provider has direct access to management, and understand how the analysis developed rather than only where it landed.
This doesn’t require a separate report. It can mean a structured conversation with the FDD provider at the start of the process about what the lender needs and how the reliance position should be framed. It can mean engagement at key points during diligence rather than a single delivery at the end. What it requires is treating early engagement as the default: the mechanism for getting exactly the comfort the SBA has now made mandatory, without needing a regulator to mandate it. With the US deadline coming up tomorrow, this is as good a prompt as any for UK lenders to start asking these questions of their own book now, rather than waiting for a rule to make them.
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Why buyers should care too
The buyer may be underwriting value. The lender is underwriting repayment. Both start with the same numbers. But they are asking fundamentally different questions about those numbers. Buyer FDD asks what is being bought, what sustainable EBITDA looks like, what affects price, and what the buyer should protect against. Lender FDD asks what is being lent against, whether it becomes cash, what happens in a downside, and whether the debt can be serviced. Same underlying data. Different lens.
When buyers and lenders engage early enough to understand each other’s needs, risks and perspectives (when the lender knows what the buyer is trying to establish, and the buyer understands what the lender needs to underwrite), both parties can engage with the FDD process in a way that serves them both. The analysis is more useful, the transaction moves more efficiently, and the earnings number that ultimately underpins the deal is one both sides have genuinely interrogated rather than one each has taken on faith.
The conclusion
The SBA has not discovered lender diligence. It has made a defined class of lenders directly accountable for the quality of the earnings underpinning their credit decision, on transactions above a defined size.
UK lenders do not need the same rule to ask the same question, and they should not wait for one to appear. The comfort SOP 50 10 8.1 is designed to mandate (independently assessed, cash-supported earnings, understood well before the debt is drawn) is already available to any lender willing to shape the diligence process rather than wait for its output.
Because whether you are buying the equity or funding it, you eventually arrive at the same question: how much of this EBITDA is actually real, repeatable and capable of becoming cash? The SBA has made that question mandatory in the US. UK lenders should be asking it now.
How Evolution Capital can help
Evolution Capital provides Financial Due Diligence for both buyers and acquisition lenders across the UK IT and Telco market.
Where we are already undertaking buyer-side FDD, lender requirements can be incorporated into the process from the outset, extending the work through Adjusted EBITDA, cash conversion, debt service and DSCR, so the buyer isn’t left commissioning one diligence exercise only to discover weeks later that the lender needs a different set of answers.
Where there is no buyer FDD in progress, we also undertake standalone Acquisition Finance Due Diligence for lenders: a narrower, faster engagement focused on Quality of Earnings, cash validation, revenue quality, customer concentration and debt service, without the full scope of buyer-side work around net debt, working capital and completion mechanics.
We have an interactive FDD offering, meaning buyers and lenders can test, slice and interrogate the analysis behind the numbers while the transaction is live: filtering by customer, product or time period, running their own downside scenarios, and tracing an adjustment back to the underlying data, rather than waiting for a finished report to land at the end of the process. It turns a static number into something both sides can actually work with.
If you’re acquiring, financing or advising on a technology business and want to talk through how the diligence process could be structured around both the transaction and the financing, get in touch.
A Note on Confidentiality
What is a Quality of Earnings report and how does it differ from FDD?
A QoE report focuses specifically on establishing whether reported EBITDA is real, recurring and sustainable, typically for lender underwriting or buyer valuation purposes. It tests add-backs, reconciles financial information across multiple sources, and assesses revenue sustainability and cash conversion. A full FDD report covers broader transaction diligence including working capital, net debt, balance sheet quality, forecast review and SPA implications. QoE is a core component of FDD, not a substitute for it.
Does the new SBA rule apply to UK transactions?
No. SBA SOP 50 10 8.1 applies to qualifying US SBA-backed acquisition financings above the $3 million threshold. It does not apply to UK transactions. However, the analytical standard it has formalised is relevant to any acquisition lender, regardless of geography.
What is a Cash Proof?
A Cash Proof uses bank activity to independently corroborate the financial information supporting the QoE, reconciling cash receipts and disbursements with the accounting records and tax returns across the prescribed periods, typically the trailing twelve months and the prior two fiscal years. Its purpose is to test whether reported earnings are supported by actual cash activity, rather than timing differences, unrecorded items or misstatements. It is one of the more forensic elements of the SBA QoE requirement.
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