A quality of earnings report is an independent test of whether a business's earnings are real and likely to continue after it changes hands. It rebuilds the profit number from source documents, mainly bank statements, filed tax returns and the general ledger, and shows which adjustments hold up and which do not. It is usually ordered by a buyer or a lender during the deal, after the LOI is signed. It is not an audit, a valuation or a tax return review.
The short version: whether the earnings figure the deal is priced on can be traced to money that actually moved.
Small business financial statements are mostly built to file taxes, not to sell a company. Personal expenses run through the business. Revenue is often recorded when cash arrives rather than when it is earned. One-time jobs sit next to recurring work with nothing to tell them apart. None of that is unusual, but it means the P&L in the confidential information memorandum (CIM) is a starting point, not an answer.
Our engagements run ten procedures:
Most of what a QoE turns up comes out of that last item. Why did margins drop in the third quarter? Which of these expenses stop after closing? Who is this vendor? The written answers are what let an adjustment stand up in underwriting.
Because the two often disagree, and neither one by itself says what a new owner will earn.
The tax return shows what was reported to the IRS. The P&L shows what the bookkeeper recorded. The CIM shows the P&L plus add-backs, the expenses the business owner says will go away after a sale. A QoE puts all three side by side, ties them to the bank statements, and shows the remaining difference.
Here is an illustration with round numbers. A CIM shows $1,000,000 of SDE (earnings plus one owner's pay and benefits), including $150,000 of add-backs. Testing finds documents for $100,000 of the add-backs. The other $50,000 has no support beyond the owner's description. Deposits come in $20,000 below reported revenue for the year, with no explanation yet. If neither item gets support, the tested figure is $930,000, and both items go on the list of open questions for management. At a 3x multiple, that $70,000 gap is $210,000 of price.
That is the kind of finding the report is built for. More on how adjustments get tested is in which add-backs actually survive diligence.
Several parties to a deal commonly order one, for different reasons:
The SBA change is the newest driver. Under SBA SOP 50 10 8.1, effective October 1, 2026, Initial Acquisition and Business Expansion loans where the business purchase price is $3 million or more need a QoE from an independent financial professional engaged by and acting on behalf of the lender. The price is measured from the purchase agreement, less owner-occupied real estate at appraised value. The buyer's equity injection and any note carried back by the owner are not deducted. Partner or owner buyouts and ESOP or cooperative conversions are exempt. The QoE supplements the business valuation rather than replacing it. The full rule is covered in Does the SBA require a quality of earnings report? Below the threshold, a lender can still ask for one, so confirm with your lender.
It gets confused with three other things. The differences matter for what you can rely on it for.
| Work product | Main question it answers | What it is not built to do |
|---|---|---|
| Quality of earnings report | Are these earnings real, and will they continue under a new owner? | Give an opinion that the statements follow accounting standards, or set a price |
| Audit | Do the financial statements follow accounting standards? | Adjust for owner expenses or test whether earnings will continue after a sale |
| Business valuation | What is the business worth? | Check that the earnings it is based on actually happened |
| Lender underwriting | Does cash flow cover the loan payments? | Tie deposits to revenue or compare the books to filed returns |
It is also not a tax review. A QoE describes the book to tax differences it finds and how they affect earnings. It does not give tax advice. If something in the report raises a tax question, talk to your attorney or tax adviser.
And it is not a promise about the future. The report describes what the documents show and the remaining differences. The projection model is a model, built from tested history.
A full report in a slide deck, plus the workbook behind it, walked through on a call. The deck states the findings. The workbook holds the support: the reconciliations, the add-back schedule, the customer analysis, the projection model and the Q&A log.
The Q&A section is for the buyer and lender to read in full and follow up on. The executive summary covers the items with the largest effect on earnings, not the full list of open questions.
The sample quality of earnings report page shows how the deck and workbook are laid out, and sample reports are available on request.
Generally two to four weeks from the day we receive the documents. The company's response time sets most of the pace. A business with a bookkeeper and closed monthly books moves faster than one where the owner exports reports one at a time.
Our fee is $7,500 flat for SBA-sized deals, whether or not SBA financing is used. Deals larger than SBA size are scoped and priced to the work after a call, and the fee is quoted before work starts. There is no hourly billing. An added fee applies in two situations, quoted once the documents are in: when the company has no financial statements and they have to be built, and when the deal includes more than one business. Details are on the pricing page.
We have completed more than 600 QoE engagements and take on about 40 a month. The work is done by a U.S.-based team and reviewed in-house by a CPA-led team. A full description of the service is on the quality of earnings page.
It is the core of financial due diligence on a small business. Diligence also covers legal, operational and other areas that a QoE does not address.
Usually both. Smaller owner-operated businesses are commonly priced on SDE, and larger ones on adjusted EBITDA. The report recalculates whichever measure the deal uses and shows the bridge between them.
That depends on who engaged the provider and what the parties agree. A buyer's report is generally prepared for the buyer. A lender-engaged report under the SBA rule is prepared on behalf of the lender. A sell-side report is ordered by the owner to share with buyers.
Most of the time it moves the price rather than ending the deal. The report gives both sides a documented figure to negotiate from.