What Is a Quality of Earnings Report — and Do You Need One to Buy a Business?

A quality of earnings report — a QoE, in deal shorthand — is an independent accountant's deep check of a business's profits: whether the earnings on the broker's listing sheet are real, whether they'll keep showing up after closing, and whether the add-backs behind the asking price survive contact with the bank statements. Buyers typically order one right after signing a letter of intent. On a Main Street deal it runs roughly $10,000–$25,000 and takes three to four weeks. And as of October 1, 2026, it stopped being optional on bigger deals: SBA lenders must now obtain a QoE on any 7(a) acquisition priced at $3 million or more.

Not an audit — something more useful

People hear "accountant's report" and think audit. Different animal. An audit asks whether the financial statements follow accounting rules. A QoE asks the question a buyer actually cares about: are these earnings sustainable, defensible, and real? An audit tells you the books follow the rules. A QoE tells you whether the profits would follow you home.

In practice, the accountant doing a QoE will run a cash proof (match the revenue on the P&L to the money that actually hit the bank), reconcile the statements to the filed tax returns, test every add-back the seller claimed, flag related-party arrangements like below-market rent from a building the owner also happens to own, and look at revenue trends and customer concentration. The output is usually a 30–80 page report that ends in one number: adjusted earnings. That number — not the one in the marketing book — is what the deal gets re-priced on.

Most small businesses have never been audited and never will be. Their books live in QuickBooks, maintained with varying enthusiasm. That's not an insult; it's exactly why the QoE exists.

Sources: Breakwater M&A, QoE Report Cost (2026); Axial, Dead Deal Report; Weaver, on SBA SOP 50 10 8.1.

Why buyers pay five figures to check someone else's math

Because the math is wrong often enough to matter. Advisory firms that do this work report that QoE reviews commonly find EBITDA adjustments of 10–30% — almost always downward. And when Axial studied 75 broken LOIs, earnings discrepancies alone killed 21.3% of them, with other diligence findings taking another 25.3%. Nearly half of dead deals, in other words, died because someone finally looked closely.

The arithmetic makes the fee look small. Main Street businesses sell for about 2.7× cash flow, so at a round 3× multiple, every $10,000 of overstated earnings is $30,000 of overpayment. A $15,000 report doesn't have to find much to pay for itself. It usually finds more than "not much."

There's a seller version of this logic too, and it's not complicated: whatever the buyer's accountant is going to find in week six, you'd rather find in month minus-three. More on that below.

The new SBA rule: QoE goes mainstream

This used to be a private-equity habit that trickled down. Now it's regulation. The SBA's updated lending rules — SOP 50 10 8.1, issued August 14, 2026 and effective October 1, 2026 — require 7(a) lenders to obtain a quality of earnings report on business acquisitions with a purchase price of $3 million or more, excluding owner-occupied real estate.

Two details matter. First, the report is conducted for the lender's benefit — an independent professional reconciles the books to the tax returns, runs the cash proof, and reviews related-party transactions, whether or not the buyer wanted to pay for that. Second, lenders are expected to use the QoE-adjusted earnings in their debt-service coverage math. SBA's floor is a 1.15 coverage ratio and most lenders want roughly 1.25. So if the QoE trims the earnings, the loan the deal can support shrinks with it — and with about 78% of buyers counting on SBA financing, a haircut in that report re-prices the deal whether anyone likes it or not.

Below $3 million, the report stays technically optional. But the direction of travel is obvious, and plenty of lenders were already asking for one on deals half that size. If you're pricing a business off generous add-backs, the era of nobody checking is over.

What it costs, and how long it takes

For businesses with under $1 million in earnings, a buy-side QoE typically runs $10,000–$25,000 and takes three to four weeks. Boutique firms serving SBA-sized deals quote $10,000–$20,000 for companies under $10 million in revenue, and stripped-down "QoE lite" reviews exist in the $5,000–$10,000 range for very small deals. Messy books cost extra — poor recordkeeping can add 20–40% to the bill, which has a certain justice to it.

One practical warning from the buyers who've shopped this market: quotes for materially the same scope vary roughly 2–6× between firms. A famous name on the cover letter costs real money and rarely changes the findings. Get three quotes, compare scope line by line, and ask what's an add-on.

Sellers can run this play in reverse. A sell-side QoE — ordered two to three months before going to market, usually 10–20% cheaper than the buy-side version — finds the landmines while you can still fix or disclose them on your terms, and can cut two to four weeks off the buyer's diligence. On a deal that will cross the $3 million SBA line, it's close to self-defense: you already know a QoE is coming. The only question is who commissions the first one.

If you're selling: assume you'll be QoE'd

The preparation is unglamorous and works. Keep the P&L reconciled to the tax returns — the first thing every QoE checks is whether those two documents describe the same business. Document every add-back with invoices, not memory. Stop running personal expenses through the company at least a year out; every dollar of "it's basically mine anyway" now needs a paper trail to count in the price. Our 12-month preparation plan walks through the full cleanup, and if you're still at the "what's my business worth" stage, start with what a reasonable multiple looks like.

This is also a decent test of the broker you're interviewing. A good one pressure-tests your add-backs before listing, prices off numbers that will survive a QoE, and tells you the uncomfortable smaller number early — because they've watched deals re-trade in week ten, usually around the time the exclusivity clause in the LOI has taken you off the market. A broker who takes your add-backs on faith and promises a price to match isn't optimistic; they're renting your signature. That's one of the red flags worth checking before you sign anything.

Frequently asked questions

How much does a quality of earnings report cost?

On Main Street: $10,000–$25,000 buy-side for a business under $1 million in earnings, three to four weeks of work. Lighter reviews run $5,000–$10,000; sell-side reports typically cost 10–20% less than buy-side. Quotes vary 2–6× between firms for similar scope, so collect at least three.

Is a quality of earnings report required for an SBA loan?

On larger deals, yes — since October 1, 2026, SOP 50 10 8.1 requires 7(a) lenders to obtain one on acquisitions priced at $3 million or more (excluding owner-occupied real estate). Below that it's the lender's call, and many ask anyway. Either way, the lender runs its coverage math on the QoE-adjusted earnings, not the listing-sheet number.

Is a QoE the same as an audit?

No. An audit checks compliance with accounting rules; a QoE checks whether the earnings are real and sustainable — cash proof against bank deposits, reconciliation to tax returns, add-back testing, related-party review. Most small businesses have never been audited, which is precisely why buyers and lenders order the QoE instead.