What is a quality of earnings report and do I need one?

A quality of earnings report, or QoE, is an accountant's rebuild of your earnings from bank statements, tax returns, and the general ledger. It tests three things: whether revenue is real, whether each expense is recurring or one-time, and whether every add-back has paper behind it.

The SBA version must include a cash proof. That means deposits in your bank accounts are tied to the revenue on your books for the trailing twelve months and for the last two fiscal years. The output is normalized earnings, and the buyer's lender uses that number, not your tax return.

Know which earnings measure you are talking about. SDE is net profit plus one owner's full compensation plus documented add-backs. EBITDA is SDE minus a market-rate salary for a replacement manager. The SBA coverage test uses EBITDA. Our page on seller discretionary earnings covers the first measure in detail.

Take a business with $1,000,000 of revenue and $250,000 of SDE. That is a 25% margin. If the accountant cannot support part of your add-backs, SDE falls below $250,000, and every dollar removed comes off the price at whatever SDE multiple the buyer applies. Capital items such as deferred maintenance are different. They come off the price, not off earnings.

Before anyone else looks, tie every add-back in your $250,000 SDE to an invoice, a payroll record, or a bank statement, using the add-back guide as the checklist.

SOP 50 10 8.1 requires a QoE when the business purchase price is $3,000,000 or more on an Initial Acquisition or Business Expansion. The rule is in force for loans numbered on or after October 1, 2026. Owner Buyouts and ESOPs are exempt.

Business purchase price here means the purchase price less appraised owner-occupied real estate, measured before the equity injection and seller notes.

The report exists for the lender's benefit. Under Appendix 15 it may not be prepared by or for the seller, so you cannot order one that satisfies the rule. The lender must use the QoE's normalized earnings in its coverage calculation. A buyer can order the report, but under the September 25 technical update it counts only if the lender's qualified vendor reviews it and it meets SBA minimums.

This matters because the SBA requires at least 1.25x coverage on historical results, and projections cannot be used to meet it. If the QoE lowers earnings, the loan supports less debt. The buyer then asks for a lower price, more cash, or more seller debt on full standby.

A buyer financing a purchase of $3,000,000 or more with an SBA loan will therefore arrive with a QoE, and the price you agreed in the LOI can move on what it finds.

A seller-ordered report will not satisfy the SBA requirement, so order one only as a private check on your own numbers. Its value is finding problems before a buyer's accountant does.

Make the decision on price. If you expect a price below $3,000,000, the SBA does not require a QoE. The lender will still test value. At $350,000 or less it may value the business in-house. Above $350,000 it must order an independent valuation from a Qualified Source, and that valuation caps total acquisition debt. Buyers can still run their own earnings review in diligence.

If you expect $3,000,000 or more and an SBA-financed buyer, plan for a buyer-side QoE. A clean set of books shortens it and keeps the earnings figure in your LOI intact.

Munera's preparation phase runs 4 to 8 weeks before marketing starts, and the whole path from decision to signed LOI runs 3 to 6 months. Read how long a sale takes to place this work in the timeline. Use the preparation window to reconcile your books to bank statements for the last two fiscal years and the trailing twelve months, the same periods an SBA cash proof covers.