What is a quality of earnings report, and do you need one to sell?

What is a quality of earnings report?

A quality of earnings report, usually called a QoE, is a check of your financial records by an outside accountant with no stake in the business. The accountant tests whether the profit you report is real, repeats and would carry over to a new owner.

It is not an audit. An audit gives an opinion on whether financial statements are fairly stated, and a QoE gives no such opinion. It is not a valuation either: it says what the business earns, not what it is worth.

There is no fixed professional standard, so what a QoE covers is whatever the engagement letter says, meaning the contract with the accountant. A QoE typically covers the last three fiscal years plus the trailing twelve months, meaning the latest 12 months, and focuses on adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, corrected for one-offs and owner perks). For which measure suits your size, see SDE vs EBITDA.

What does a quality of earnings report check?

The SBA's list of what a lender's report must cover is a good guide, and reviewers also look at working capital:

Test	What the accountant compares	What trips owners up
Cash proof (rebuilding what came in and went out of the bank)	Bank statements against your profit and loss statement and tax return	Deposits that don't match reported sales; personal money in business accounts
Add-backs	Each personal or one-off cost you add back to profit, against invoices (how add-backs are tested)	No invoices; "one-offs" that happen every year
Owner pay and related parties	Your pay, family pay and rent paid to yourself, against market rates	Pay set for tax reasons
Revenue and margins	Sales by month and customer, and margins over time	One customer making most of the sales (customer concentration)
Working capital	What customers owe you, inventory and unpaid bills	Slow-paying customers; stock that doesn't move
Accounting basis	Cash-basis books (income and costs counted when money moves) restated to accrual (counted when earned or incurred)	Revenue and costs landing in different years

Who orders a quality of earnings report, and who pays?

Report	Who orders and pays	Who can rely on it
Buyer's	The buyer, often after the letter of intent (the signed outline of the deal) and before the purchase agreement	The buyer. An SBA lender can use it only after its own approved vendor has reviewed it
Seller's (sell-side)	You, before going to market	An SBA lender cannot rely on it
Lender's (SBA)	The lender obtains it for its own benefit; the cost can be passed to the buyer	The lender

On an SBA-financed sale, SBA's rule is that the lender's QoE must be done by an independent, experienced financial professional for the lender's benefit and "must not be prepared by or for the seller" (SBA SOP 50 10 8.1, Appendix 15). So a report you order does not replace it, even at $3 million or more. It can still help you prepare: you find problems first and can answer the lender's and buyer's questions faster.

When does an SBA lender require a QoE?

If your business sells for under $3 million, not counting real estate, SBA's rule for loans that buy a business does not require a QoE. The lender must still check the seller's figures against IRS transcripts, the IRS's own record of what you filed. The rule is days old, so ask the buyer's lender how it applies to your deal.

At $3 million or more, the rulebook for SBA 7(a) loans (bank loans the SBA guarantees), SBA SOP 50 10 8.1 (Appendix 15, effective October 1, 2026), says:

For Business Expansion and Initial Acquisition transactions where the Purchase Price as defined in Paragraph A.1 is equal to or greater than $3 million, the Lender must also obtain a Quality of Earnings (QoE) in addition to the required Business Valuation.

In plain terms:

• The $3 million is the business purchase price. That is the agreed price minus any owner-occupied commercial real estate, at its appraised value, and before the buyer's cash and any seller note. For example, a $3.5 million deal that includes a $1 million building has a business purchase price of $2.5 million.
• It covers initial acquisitions and expansions. That means a buyer who is new to the business or has worked there under 24 months, or a company buying another. Owner buyouts (including a sale to someone who has worked there at least 24 months) and employee stock ownership plan (ESOP) or cooperative purchases are exempt, because the people who run the business stay in place. So is owner-occupied special purpose property (a building usable only for one purpose), such as hotels or storage units.
• It feeds the loan test. The lender must use the QoE earnings to test debt service coverage, which asks whether earnings cover the loan payments. For an initial acquisition the minimum is 1.25 to 1. If coverage does not support the valuation and the debt, the lender must reduce the loan, and more cash from the buyer can close the gap.

For you, that means the buyer usually pays: the SBA lets the lender pass the cost on, and money spent on the report counts toward the buyer's required cash injection. One firm puts a standard buyer-side report at four to six weeks, so ask the buyer's lender when the report will start and how long it should take. For the rest of what changes, see selling to a buyer with an SBA loan.

Do you need to order your own?

For many owners selling under $3 million, a seller-ordered report is optional: no rule requires it, an SBA lender cannot use it (and at $3 million or more it does not replace the lender's own report), and the cost is real. It may be worth it if you have several entities or untidy books. Your CPA or broker can say if it is worth it at your size.

Do not count on it raising your price. One public dataset, from GF Data, covers private-equity-backed deals of $10 million and up. Across its 360 deals, sellers with a report averaged 7.4 times EBITDA against 7.0 without, but below $50 million it found little effect: in the $10 million to $25 million bracket the average price was 5.9 times EBITDA with a seller's report and 6.6 times without. The author points to the mix of deals, so this does not show a report lowers your price either.

What does a quality of earnings report cost?

There is no neutral price list. This figure comes from one firm that sells the reports and cites no outside data. We read it on October 7, 2026.

BD Emerson puts a buyer's report on a deal under $5 million at $20,000 to $35,000, usually a limited-scope review (a lighter check with fewer tests). It says a seller's report runs 10% to 30% higher and typically takes five to eight weeks, and that cash-basis or hybrid (part cash, part accrual) books add 20% to 50%, because the team must rebuild monthly accrual figures first. Get two or three quotes and ask what the scope covers.

A lighter alternative: prepare the numbers yourself

Small-business accounts are prepared for tax reporting, not to show a buyer the cash flow available to an owner. Recasting presents the same records in the way buyers and lenders assess them.

Do that recast yourself, with your CPA: three years of financials, every add-back documented, and the figures checked against your bank statements and tax returns. It is not a QoE, and a buyer's accountant or lender will still run its own checks, but it shows you what they will see first. CPA firm SEK's advice to sellers on the new rule is to get records consistent, complete and supportable before going to market.

• For each of the last two fiscal years, check that the tax return, profit and loss statement and bank deposits agree. For the latest twelve months, compare the profit and loss statement with bank deposits. Note every gap and why.
• Check that your filed returns match your IRS tax transcripts (request personal ones from the IRS; your CPA can help with business returns).
• List owner perks and personal items with receipts, and total them on a one-page add-back schedule.
• Compare your pay, family pay and any rent you pay yourself with market rates.
• Break sales down by customer for three years.
• If your books are cash-basis, ask your CPA for an accrual version of last year.

What to do next

This weekend, do the first item on that list for your last full fiscal year. Then take the gaps to your CPA and ask where a reviewer would push back, and whether a lighter check (fewer tests, lower fee) or a full report suits a sale your size.

If a buyer or lender mentions a QoE, ask who orders it, what it covers, who pays and how long it takes. For the wider list, see how to prepare a business for sale and the documents buyers ask for.

Keep reading

• Add-backs when you sell a business: what buyers accept
• SDE vs EBITDA: which one will a buyer use to price your business?
• Selling to a buyer with an SBA loan: what changes for you
• Documents needed to sell a business: the due diligence list

This guide is general information, not tax, legal or valuation advice. Every business is different: talk to your accountant, lawyer and broker about yours.