Quality of earnings report: what it is, what it costs, and when the SBA requires one

What a Quality of Earnings report is

A Quality of Earnings (QoE) report is an independent accounting review of a business's earnings. It answers one question: are the earnings a buyer is paying for real, repeatable and correctly adjusted? It isn't an audit, and it isn't a valuation. It's the bridge between the seller's tax returns and the adjusted earnings in the listing.

What's inside

• Proof of cash: bank deposits reconciled to reported revenue and tax returns.
• Add-back validation: every owner perk, one-time cost and personal expense the seller added back, tested against support.
• Normalized earnings: SDE or adjusted EBITDA after the reviewer's adjustments, often lower than the listing's number.
• Net working capital: the normal level of receivables, inventory and payables, which becomes the working capital target in the purchase agreement.
• Debt-like items: things that reduce the price dollar for dollar, like unearned customer deposits, deferred revenue, accrued bonuses and unpaid taxes.
• Customer concentration and revenue quality: recurring vs. one-time revenue, and how much depends on a few customers.

When the SBA requires one

For SBA 7(a) loans numbered on or after October 1, 2026, a QoE is required for initial acquisitions and business expansions with a purchase price of $3 million or more, excluding owner-occupied real estate. Owner buyouts and ESOP transactions are exempt. The rules also say:

• The lender orders it. It must be independent and can't be prepared for the buyer or the seller.
• It must include a proof of cash covering the trailing twelve months and the last two fiscal years.
• The lender must use the QoE's normalized earnings in the 1.25x debt coverage test.
• QoE and valuation costs can count toward the buyer's equity injection.

That last rule matters to sellers too: if the QoE trims your earnings by 10%, the debt a buyer can carry drops with it, and so does the price they can pay.

What it costs and how long it takes

For small business acquisitions, QoE reports typically run from about $5,000 to $50,000. Deals under $5M often land in the $5,000 to $15,000 range with boutique firms, while larger accounting firms commonly start around $25,000. Expect two to four weeks from kickoff, longer if the books are messy.

Should a seller get one first?

If you're selling a business worth $2M or more, a sell-side QoE is often worth it. You find the problems before a buyer does, you defend your add-backs with documentation instead of arguments, and you cut weeks out of diligence. Buyers retrade on surprises. A clean QoE removes most of them.

What QoE reviewers usually find

• Cash revenue that isn't in the books, which a buyer won't pay for.
• Add-backs without receipts.
• Owner pay set below market, which flatters earnings.
• Customer deposits treated as revenue before the work is done, common in construction.
• Year-end adjustments that move revenue or expenses between years.

How I use QoE in a deal

I review deals the way a QoE reviewer will before anyone pays for one. For sellers, that means fixing what I can before the business goes to market. For buyers, it means not falling in love with a number that won't survive the bank. When a formal QoE is needed, I coordinate an independent firm and work through the findings with you.

FAQ

Sources

• QoE report cost (WebAcquisition)
• SBA SOP 50 10 8.1 summary (Accredited)
• New SBA business acquisition rules (PBMares)

This guide is general information, not legal, tax or lending advice. SBA rules and Florida law change; confirm current terms with your lender, attorney and CPA.