What Is a Quality of Earnings (QoE) Report? A Guide for Business Buyers and Sellers
Rachel Horner
⋅
10 min read
When a buyer agrees to purchase a business, they need to understand how much the business actually earns.
The seller may report $1 million in adjusted earnings. But does that figure reflect the business's sustainable profitability, or does it rely on expenses that have been understated, add-backs that won't hold up, or assumptions about how the company operates?
A quality of earnings (QoE) report digs into the financials to find out. It's a detailed analysis of a business's earnings, typically conducted by an accountant during due diligence. The findings can influence the final purchase price, financing, and whether a deal closes at all.
As of October 1, 2026, it's also required for many SBA-financed acquisitions. Here's what a QoE is, what it covers, what it costs, and how to make sure it doesn't catch you off guard.
What Is Quality of Earnings (QoE)?
A quality of earnings (QoE) report is an independent review of a business's financial records that shows how much of its reported profit is real, recurring, and likely to continue. It's usually prepared by an accounting firm during the sale of a business. The main output is an adjusted earnings figure, typically adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), that buyers and lenders use to set price and size the loan.
In plain terms, a QoE answers one question: if I buy this business, how much will it actually earn for me?
You'll see the term used two ways. In mergers and acquisitions (M&A), "QoE" almost always means the report. In investing, "quality of earnings" can also describe how closely a company's reported profit tracks its actual cash flow.
This article focuses on the first meaning, with a quick note on the second in the FAQ.
Why a Quality of Earnings Report Matters
Small business prices are usually set as a multiple of earnings. That makes every dollar of earnings worth several dollars of price, and it's why a QoE carries so much weight. Each party in the deal relies on it for something different.
Buyers use a QoE to confirm they're paying for earnings that will still be there after closing. It's the best protection against overpaying for a business whose profit was propped up by one-time events, aggressive add-backs, or an owner doing two people's jobs for free.
Sellers feel the impact most directly. Every add-back you claimed when listing the business gets tested. The ones that hold up support your price. The ones that don't can lead to a lower offer late in the process, which is exactly the kind of retrade sellers dread.
Lenders use QoE-adjusted earnings to decide how much they'll lend. If the adjusted number comes in lower, the loan can shrink, and the buyer has to cover the difference or renegotiate.
The New SBA Quality of Earnings Requirement
Starting October 1, 2026, SBA lending rules (SOP 50 10 8.1) require a QoE for many SBA 7(a) acquisitions. According to CLA's summary of the rule:
Which deals: initial acquisitions and business expansion acquisitions with a business purchase price of $3 million or more. Owner buyouts, employee stock ownership plans (ESOPs), and cooperatives are exempt.
How the $3 million is measured: before buyer equity, seller debt, or other financing. The appraised value of owner-occupied commercial real estate is left out.
Who prepares it: an independent, experienced financial professional working for the lender. A QoE prepared by or for the buyer or seller doesn't satisfy the rule.
What it must cover: reconciling accountant-prepared statements, tax returns, internal statements, and IRS transcripts; a proof of cash tying bank data to the income statement and tax returns for the trailing 12 months and last two fiscal years; documented add-backs; and an assessment of revenue quality, including customer concentration.
How it's used: the lender must use the QoE-adjusted earnings to test debt service coverage.
If you're selling a business priced at $3 million or more to a buyer using SBA financing, plan for the buyer's lender to order its own QoE, even if you've already had one done.
What a Quality of Earnings Report Includes
Every firm formats its report differently, but most QoE reports cover the same core areas.
Adjusted EBITDA. The heart of the report. The accountants start with reported earnings and make adjustments to show what the business earns on a normal, ongoing basis.
Quality of earnings adjustments. These are the line-by-line changes behind adjusted EBITDA. The most common ones:
Owner compensation: replacing what the owner pays themselves with a market salary for the role. This can raise or lower earnings.
Non-recurring items: adding back true one-time costs, like a lawsuit settlement, but only if they won't happen again.
Personal expenses: adding back personal costs run through the business, like a family vehicle.
Related-party transactions: restating deals with the owner's other businesses, such as rent on a building the owner also owns, to market rates.
Run-rate adjustments: accounting for changes partway through the year, like a price increase or a lost customer. These are often the most debated.
Proof of cash. The accountants tie the revenue on the income statement to actual deposits in the bank. If the books say $3 million came in and the bank says $2.7 million, that gap needs an explanation.
Net working capital. The report calculates the normal level of working capital (receivables and inventory minus payables) the business needs to run. That figure often becomes the "peg" in the purchase agreement, which can move the final price up or down at closing.
Debt-like items. Obligations that aren't on the loan schedule but still reduce what the business is worth, like unpaid taxes, deferred revenue, or customer deposits.
Revenue quality. How concentrated revenue is among a few customers, whether contracts will continue, and whether margins will hold.
Quality of Earnings vs. Audit: What’s the Difference?
A QoE and an audit both involve accountants combing through your financials, so they're easy to confuse. They answer different questions.
An audit asks whether your financial statements follow accounting rules, such as generally accepted accounting principles (GAAP). It looks backward, follows strict professional standards, and ends with a formal opinion.
A QoE asks what the business will earn for its next owner. It's forward-looking, tailored to the deal, and focused on the adjustments that drive price. A business can pass an audit with flying colors and still have a QoE that cuts its earnings, because a perfectly accurate expense can still be one that a new owner won't (or will) have.
Many small businesses have never been audited, and buyers don't expect them to be. A QoE is the more common, and more useful, check in a small business sale.
Sell-Side vs. Buy-Side QoE
A buy-side QoE is ordered by the buyer (or, under the new SBA rule, the buyer's lender) after a letter of intent (LOI) is signed. It's part of due diligence, and its findings can change the price or terms.
A sell-side QoE is ordered by the seller before going to market. It doesn't replace the buyer's review, and it won't satisfy the SBA requirement. What it does is let you find the weak add-backs first, on your own timeline, while you can still fix them or adjust your asking price. You go into negotiations with numbers that have already been tested, and the buyer's QoE is far less likely to turn up surprises.
How Much Does a Quality of Earnings Report Cost?
Cost depends mostly on the size and complexity of the business. One CPA firm, Midwest CPA, published these ranges in 2025:
Under $2.5 million in revenue: $12,000 to $15,000
Under $10 million in enterprise value: $14,000 to $23,000
Over $10 million in enterprise value: $25,000 and up
Factors that push costs higher are multiple locations or entities, industries with complex accounting (construction, software subscriptions, inventory-heavy retail), and messy records that take longer to reconcile.
How Long Does a QoE Take?
The same firm puts a typical QoE at two to four weeks. Much of that depends on you: the faster you hand over clean statements, tax returns, bank records, and payroll data, the faster the accountants can finish.
How to Prepare for a Quality of Earnings Review
Most QoE surprises come from the same handful of issues: add-backs with no paperwork behind them, "one-time" costs that show up every year, an owner who's underpaid or doing several jobs, deposits that don't match reported revenue, revenue concentrated in a few customers, and cash-basis books that record income or expenses in the wrong period.
Each of these is easier to fix months before you list than weeks before you close. A little cleanup goes a long way:
Separate personal and business expenses going forward, so there are fewer add-backs to defend.
Document every add-back with receipts and a one-line explanation.
Reconcile your books to your tax returns and bank statements, and be ready to explain any differences.
Pay yourself, and family members, a market-rate salary so owner compensation adjustments are simple.
Consider a sell-side QoE if your business is larger, your books are complex, or you expect an SBA buyer at $3 million or more.
Get a realistic valuation early, based on earnings that will hold up, not the most optimistic version of them.
Final Thoughts
A quality of earnings report decides what your earnings are worth to someone else. For buyers, it's protection against overpaying. For sellers, it's the moment every add-back gets tested, and for larger SBA deals, it's now a requirement.
The sellers who come through a QoE best are the ones who knew their real numbers before anyone else looked. That starts with a valuation built on earnings that will hold up. Baton's free valuations are anchored to real comparable transactions, so you know where you stand before a buyer's accountants ever open your books.
Quality of Earnings FAQs
What Is a QoE in M&A?
In M&A, a QoE is a report, usually prepared by an independent accounting firm, that tests a business's reported earnings and adjusts them to show sustainable, recurring profit. Buyers and lenders use the adjusted figure to set the price and size the loan.
What Is a Good QoE Ratio?
The quality of earnings ratio is operating cash flow divided by net income. A ratio above 1 generally means profit is backed by real cash. A ratio consistently below 1 suggests earnings depend on accounting entries more than cash coming in. Investors use this ratio for public companies; in a small business sale, the full QoE report matters far more.
How Do You Check Quality of Earnings?
Compare reported earnings with cash in the bank, test each add-back against documentation, normalize owner pay to market rates, and look for revenue that depends on a few customers or won't recur. A QoE report does all of this in one place.
Who Pays for a Quality of Earnings Report?
The party that orders it usually pays. Buyers typically pay for a buy-side QoE, and sellers pay for a sell-side QoE. Under the new SBA rule, the lender orders the QoE, and who bears the cost depends on the lender and the deal.
Is a Quality of Earnings Report Required for an SBA Loan?
As of October 1, 2026, yes for many deals. SBA 7(a) initial acquisitions and business expansion acquisitions with a purchase price of $3 million or more need an independent QoE prepared for the lender. Owner buyouts are exempt.