Quality of earnings report for a small business acquisition: do you need one?
Short answer
For SBA-financed Initial Acquisitions and Business Expansions with a purchase price of $3 million or more, a Quality of Earnings (QoE) report is required, and the lender orders it. Below $3 million nobody requires one, but the risks a QoE looks for (inflated add-backs, revenue that never reached the bank, related-party items, deferred maintenance) still exist.
Below that size, buyers usually combine their own earnings checks with targeted work by a CPA, scaled to the deal.
A Quality of Earnings report is the most thorough check on whether a business's earnings are real. It's also expensive and slow enough that it only makes sense above a certain deal size. The question for most small buyers isn't "QoE or nothing", it's how much checking each deal deserves.
What a QoE does
- Reconciles internal financials, accountant-prepared statements, tax returns and (for SBA) IRS transcripts.
- Rebuilds revenue from bank data: a cash proof.
- Tests every add-back and adjustment.
- Looks at revenue quality: concentration, contracts, churn, sustainability after the sale.
- Reviews working capital and accounting methods.
Which level of checking fits your deal
| Option | Who does it | Fits |
|---|---|---|
| Your own checks | You, with tools | Every deal, before the LOI |
| Earnings check (e.g., OKtoBuy Deal Check) | Automated check with sources, checked by a person | Screening and pre-LOI checks |
| CPA agreed-upon procedures or targeted review | Your CPA | Deals where specific areas worry you |
| Buyer-commissioned QoE | Independent firm, for you | Larger non-SBA deals; in SBA deals, usable with a reliance letter or a secondary review by a different firm |
| Lender-ordered QoE | Independent professional, for the lender | SBA Initial Acquisition / Expansion at $3M+ |
Our view
Do the base checks yourself on every deal, early, before you pay for anything else: they're where most problems surface. Our proof of cash and add-backs guides show how. Then add professional help in proportion to the size and messiness of the deal.
SBA quality of earnings requirement: when you need a QoE
Under SBA SOP 50 10 8.1 (effective October 1, 2026), the lender must obtain a Quality of Earnings (QoE) report, in addition to the business valuation, for Initial Acquisitions and Business Expansions where the Business Purchase Price is $3 million or more. The threshold is measured before buyer equity, seller debt or other financing, and excludes owner-occupied commercial real estate.
The QoE is done for the lender by an independent financial professional (a QoE already prepared for the buyer can be used with a reliance letter or a secondary review by a different firm, but never one prepared by or for the seller), must include a cash proof, and its earnings figure is what the lender uses for debt service coverage.
A Quality of Earnings report used to be something private equity buyers commissioned on mid-market deals. Since October 1, 2026, it's an SBA requirement for larger acquisitions. If your deal is at or above $3 million, it affects your timeline, costs and loan size.
Does your deal need one?
What the QoE must include
- Reconciliation of accountant-prepared financial statements, tax returns, internal financials and IRS transcript data into a normalized, adjusted earnings figure reflecting recurring, arm's-length operations.
- A Cash Proof: cash receipts and disbursements reconstructed by reconciling bank statement data to the income statement and tax return for each period, on a trailing-12-month basis and for the last two fiscal years. See proof of cash.
- Identification and documentation of all add-backs and adjustments, including non-recurring items, above- or below-market owner compensation, related-party transactions, deferred maintenance, and cash vs accrual differences.
- An assessment of revenue quality and sustainability: customer concentration, contract continuity, and whether revenue and margins are likely to hold after the sale.
How it affects your loan
The lender must use the QoE's earnings to calculate debt service coverage. If coverage doesn't support the valuation and the proposed debt, the loan amount must be reduced, and the gap filled with additional equity. In other words, add-backs the QoE provider rejects come straight off your borrowing capacity.
What to do as a buyer
- Find out early whether your deal crosses $3 million on the SOP's definition.
- Ask your lender who they use and how long the QoE takes; set your LOI timeline accordingly.
- Do your own earnings check first, using the same categories the QoE will test, so there are no surprises. Start with add-backs.
- Get the seller to prepare: complete bank statements for every account, tax returns, monthly financials, and add-back support.
Below $3 million, nobody requires a QoE, but the same risks exist.
Worked example: scaling diligence to deal size
Illustrative example, not a recommendation for any deal
Deal A: a $400,000 cleaning company financed with an SBA 7(a) Small loan. No QoE is required. The buyer rebuilds SDE from three years of tax returns, ties twelve months of deposits to revenue, rates every add-back, and pays a CPA for a few hours to review payroll tax filings. Deal B: a $1.8 million distributor. Still under the SBA threshold, but working capital, inventory and supplier rebates make the earnings harder to read, so the buyer commissions targeted CPA work on inventory, receivables and rebates. Deal C: a $3.4 million manufacturer, an initial acquisition. The lender must get a QoE with a cash proof; under the September 2026 technical update, a QoE already prepared for the buyer can be used if it comes with a reliance letter or a secondary review by a different firm. The buyer does their own earnings check first anyway, so the QoE confirms rather than surprises. Each buyer spends diligence money where the risk is.
What to ask a firm before you hire it for buyer-side work
- Have you done earnings reviews for SBA-financed acquisitions in this industry?
- Will your report include a proof of cash reconciling bank deposits to revenue?
- Which add-backs will you test, and how?
- Will you provide a reliance letter to my lender if needed?
- What's the fee, the timeline and what you need from the seller?
Using a QoE you already paid for
SBA Information Notice 5000-882227, effective October 1, 2026, allows a lender to use a QoE already prepared for the buyer, if the lender gets a reliance letter from the firm or has a different firm do a secondary review. A QoE prepared by or for the seller still can't be used. In practice, that means a buyer who commissions a QoE early should tell the firm at engagement that a lender may need to rely on it, and ask what a reliance letter would cost.
How to read a QoE report
- Start with the adjusted EBITDA bridge: each adjustment from reported earnings, with the support the firm saw.
- Read the proof of cash: does deposited cash match reported revenue, and what explains any gap?
- Check the trend: trailing twelve months against the prior years.
- Read the working capital analysis, which feeds the peg in your purchase agreement.
- Read every item the firm couldn't verify. Those are your open questions for the seller.
A QoE tests the earnings. It doesn't value the business, check legal risks or tell you whether to buy.
Ask for a sample report from any firm you consider, so you can see what you are paying for.
Frequently asked questions
What does a quality of earnings report cover?
It reconciles financial statements, tax returns and bank data into normalized earnings, tests each add-back, and assesses revenue quality, customer concentration and sustainability. SBA-required QoEs must include a cash proof.
Can the buyer commission the SBA's QoE?
Partly. The QoE is for the lender's benefit, and one prepared by or for the seller can never be used. Under SBA's September 2026 technical update to SOP 50 10 8.1, a QoE already prepared for the buyer can be used if it comes with a reliance letter or a secondary review by a different firm. Ask your lender before you commission one.
What does a QoE cost?
Providers price by scope and complexity, so get quotes. On SBA deals the cost may be passed to the borrower and can count toward the equity injection.
Is an OKtoBuy Deal Check a QoE?
No. It's a buyer's working check on earnings that flags issues and questions early. It isn't a QoE, audit or valuation, and lenders shouldn't rely on it.
Can I structure a deal to stay under $3 million?
Not with financing. The SOP measures the threshold on the Business Purchase Price, independent of equity, seller debt or other structuring. Excluding owner-occupied real estate is built into the definition.
Which deals are exempt?
Owner Buyouts and ESOP and Cooperative transactions, because existing owners keep operational knowledge. Deals below $3 million also don't require one.
Sources
- SBA SOP 50 10 8.1, Appendix 15 (QoE threshold, scope and independence)
- SBA Information Notice 5000-882227: Technical updates to SOP 50 10 8.1 (published Sept 25, 2026; effective Oct 1, 2026)
- Coleman Report: SBA releases SOP 50 10 8.1 technical update
Related guides
General information, not legal, tax, financial or investment advice. Rules and lender practices change; check the linked sources and talk to your attorney, CPA and lender about your deal. Examples with named numbers are illustrations, not real businesses. OKtoBuy's Deal Check does not value businesses or give price opinions.