What Is a Quality of Earnings Report?
If you’re acquiring a business with an SBA loan, your lender will almost certainly require a quality of earnings report (QoE). It’s one of the most important — and most misunderstood — documents in the entire acquisition process.
A quality of earnings report is a detailed financial analysis performed by an independent accounting firm that verifies whether the seller’s reported earnings are accurate, sustainable, and repeatable. Think of it as a financial due diligence deep-dive that goes far beyond what a standard audit covers.
For SBA lenders, the QoE report answers a simple but critical question: Is this business actually making what the seller claims it’s making?
Why SBA Lenders Require a Quality of Earnings Report
SBA lenders are putting up 75-90% of the purchase price when they finance an acquisition. They need to know the business can service the debt. A QoE report gives them confidence that the earnings used to justify the loan amount are real.
Here’s what drives the requirement:
- Loan sizing depends on cash flow. SBA loans are sized based on the business’s ability to generate enough cash flow to cover debt service (typically a 1.25x debt service coverage ratio). If the earnings are inflated, the loan is too large.
- SBA guidelines demand it. For acquisitions above certain thresholds, SBA Standard Operating Procedures effectively require independent financial due diligence. Most lenders interpret this as a QoE report.
- It protects everyone. The lender, the buyer, and even the SBA guaranty program all benefit from verified financials. Bad deals that close on inflated numbers hurt everyone.
- Sellers have incentives to inflate earnings. This isn’t about dishonesty — even well-meaning sellers may present their financials in the most favorable light. A QoE report cuts through the presentation to find the real numbers.
What a Quality of Earnings Report Analyzes
A comprehensive QoE report examines several critical areas of the business’s finances. Here’s what the analysts are looking at:
Revenue Quality
Not all revenue is created equal. The QoE team will analyze:
- Revenue sustainability: Is the revenue recurring, contractual, or one-time? A business with $1M in recurring subscription revenue is very different from one with $1M in project-based revenue.
- Customer concentration: If 40% of revenue comes from one customer, that’s a significant risk. What happens if that customer leaves?
- Revenue trends: Is revenue growing, flat, or declining? Are there seasonal patterns the buyer needs to understand?
- Revenue recognition: Is the seller recognizing revenue appropriately, or are they pulling forward future revenue to inflate current numbers?
- Pipeline analysis: What does the sales pipeline look like? Are there contracts expiring soon that could impact future revenue?
Expense Normalization (Add-Backs)
This is where most of the action happens in a QoE report. The team will scrutinize every add-back the seller claims:
- Owner compensation adjustments: If the owner pays themselves $50,000 but market rate for their role is $120,000, that $70,000 difference needs to be subtracted from earnings — not added back.
- Personal expenses run through the business: The seller’s car payment, cell phone, meals, travel — which of these are legitimate business expenses and which are personal?
- One-time expenses: A lawsuit settlement or a roof replacement might be legitimately non-recurring. But “one-time” expenses that happen every year aren’t really one-time.
- Related party transactions: Is the seller paying above-market rent to a property they own? Employing family members who don’t actually work? These distort true earnings.
- Discretionary vs. necessary expenses: Some sellers cut marketing or maintenance spending to inflate short-term profits. The QoE team will identify where the business is under-investing.
Working Capital Analysis
Working capital is often the most contentious part of a deal, and the QoE report will establish:
- Normal working capital levels: How much working capital does the business need to operate day-to-day?
- Working capital target (peg): What amount of working capital should transfer with the business at closing?
- Seasonal fluctuations: Does the business need significantly more working capital at certain times of year?
- Accounts receivable quality: Are the receivables collectible, or is there a significant amount of aged or doubtful accounts?
- Inventory assessment: Is the inventory saleable at book value, or is there obsolete stock that should be written down?
Balance Sheet Review
Beyond the income statement, the QoE report examines:
- Asset verification: Do the assets on the balance sheet actually exist and are they valued correctly?
- Liability completeness: Are there any off-balance-sheet liabilities — pending lawsuits, warranty obligations, environmental issues?
- Debt and obligations: What existing debt needs to be paid off at closing?
- Capital expenditure requirements: Does the business need significant near-term capital investment that isn’t reflected in current expenses?
How a QoE Report Differs from an Audit
Buyers often ask: “The seller has audited financials — why do I still need a QoE report?” It’s a fair question, but audits and QoE reports serve fundamentally different purposes.
- An audit verifies that financial statements are prepared in accordance with GAAP (Generally Accepted Accounting Principles). It’s backward-looking and focuses on whether the numbers comply with accounting standards.
- A QoE report analyzes whether the earnings are sustainable and what a buyer can actually expect going forward. It’s forward-looking and focuses on economic reality rather than accounting compliance.
A business can have perfectly clean audited financials and still have serious quality of earnings issues. For example, audited financials won’t tell you that 60% of revenue comes from one customer whose contract expires in six months, or that the seller has been deferring $100,000 in annual maintenance to boost profits.
Additionally, most small businesses being acquired via SBA loans don’t have audited financials — they have tax returns and internally prepared financial statements. The QoE report becomes even more critical in these situations.
How Much Does a Quality of Earnings Report Cost?
QoE reports typically cost between $5,000 and $15,000 for SBA-sized acquisitions. The cost depends on several factors:
- Business complexity: A simple service business with clean books might be on the lower end. A manufacturing company with complex inventory and multiple revenue streams will cost more.
- Revenue size: Larger businesses require more analysis.
- Quality of the seller’s financial records: If the books are a mess, the QoE firm spends more time sorting through them.
- Scope of work: Some QoE reports include tax due diligence, IT assessments, or other add-on services.
Is it worth the cost? Absolutely. Consider that you’re about to take on $500,000 to $5,000,000+ in debt to acquire this business. Spending $10,000 to verify the numbers could save you from a catastrophic mistake. We’ve seen QoE reports uncover issues that saved buyers hundreds of thousands of dollars — or killed deals that would have been disasters.
When to Order a Quality of Earnings Report
Timing matters. Here’s the typical sequence:
- Sign the LOI (Letter of Intent): You’ve agreed on price and basic terms with the seller.
- Enter the due diligence period: Your LOI should give you 60-90 days for due diligence.
- Engage the QoE firm immediately: Don’t wait. QoE reports typically take 3-6 weeks to complete, and your lender needs the results before they can issue a commitment letter.
- Provide the QoE to your lender: The lender reviews the findings and uses the adjusted earnings to size the loan.
Pro tip: Start identifying QoE firms before you even sign the LOI. Get proposals from 2-3 firms so you can engage quickly once due diligence begins. Every day you wait extends your timeline.
Red Flags a QoE Report Can Uncover
Here are the most common issues that QoE reports reveal — and any one of these could change the deal:
- Inflated add-backs: The seller claims $200,000 in add-backs, but only $80,000 are legitimate. Suddenly, the business earns 40% less than advertised.
- Declining revenue trends: The trailing twelve months look great, but the last three months show a sharp decline that the seller hasn’t mentioned.
- Customer concentration risk: One or two customers represent an outsized portion of revenue, creating significant risk if they leave post-acquisition.
- Deferred maintenance or capex: The seller has been cutting corners to boost short-term profits. The buyer inherits a business that needs immediate capital investment.
- Related party transactions at off-market rates: The seller leases the building from themselves at below-market rent. Post-acquisition, rent jumps $50,000 per year.
- Inventory issues: Obsolete, expired, or overvalued inventory that will need to be written off.
- Understaffing: The seller has been running lean — too lean. The buyer will need to hire additional staff to operate the business sustainably.
- Pending legal or regulatory issues: Lawsuits, compliance violations, or regulatory changes that could impact future earnings.
How a QoE Report Protects the Buyer
As a buyer, the QoE report is your best defense against overpaying. Here’s how it protects you:
- Price validation: If the QoE reveals lower adjusted earnings, you have leverage to renegotiate the purchase price or walk away.
- Deal structure insights: The findings might suggest structuring part of the price as an earnout tied to future performance, rather than paying everything upfront.
- Working capital protection: The working capital peg established by the QoE report ensures you receive adequate working capital at closing — not a depleted business.
- Post-closing adjustments: Many purchase agreements include mechanisms for post-closing price adjustments based on the working capital peg from the QoE.
- Risk identification: Even if the numbers check out, the QoE might identify operational risks you need to plan for as the new owner.
Choosing the Right QoE Firm for SBA Acquisitions
Not all accounting firms are created equal when it comes to QoE reports for SBA acquisitions. Here’s what to look for:
- SBA acquisition experience: Firms that regularly work on SBA deals understand what lenders look for and how to present findings in a way that moves the process forward.
- Industry expertise: If you’re buying a healthcare practice, you want a firm that understands healthcare revenue cycles and regulatory requirements.
- Turnaround time: SBA deals are time-sensitive. You need a firm that can complete the report in 3-4 weeks, not 8-10.
- Lender relationships: Firms that SBA lenders already know and trust can smooth the underwriting process.
- Clear deliverables: You should know exactly what you’re getting — a written report, a management presentation, and ongoing availability for lender questions.
At GoSBA Loans, we recommend working with experienced QoE firms that specialize in SBA acquisitions. We’ve built relationships with top-tier QoE providers across the country and can connect you with firms that understand SBA lending requirements. This ensures your QoE report addresses exactly what your lender needs to see — avoiding costly delays or rework.
The Bottom Line on Quality of Earnings Reports
A quality of earnings report isn’t just a box to check for your SBA lender — it’s one of the most valuable investments you’ll make during the acquisition process. For $5,000-$15,000, you get independent verification that the business you’re about to spend years of your life building (and potentially millions of dollars acquiring) is actually worth what you’re paying.
The QoE report protects you from overpaying, gives you negotiating leverage, and helps you plan for life as the new owner. Skip it at your peril.
Ready to Acquire a Business with SBA Financing?
At GoSBA Loans, we’ve helped entrepreneurs secure over $320 million in SBA financing in 2025 through our network of 50+ SBA lenders. Our service is 100% free to borrowers — we get paid by the lender, not you.
Every deal includes a FREE professional business plan and financial projections — a $2,500-$5,000 value at no cost to you. We’ll also connect you with experienced QoE firms, attorneys, and other professionals who specialize in SBA acquisitions.
Contact GoSBA Loans today to get matched with the right SBA lender for your acquisition. Let’s get your deal done.
