A quality of earnings report is an independent check of whether a business really earns what its owner says it earns. An accountant goes through the books line by line, tests every adjustment the seller made to profit, and lands on a number a buyer and a bank can trust. On a small business it runs about $20,000 to $40,000. Small Business Administration (SBA) lenders now require one on purchases of $3 million or more.
What a quality of earnings report actually is
Every seller hands you a profit number. Most of the time it isn't the number on the tax return. It's the tax return plus a list of adjustments: the owner's salary, the truck, the one-time repair, the family on payroll. Those adjustments are called add-backs, and they're where the price gets made.
A quality of earnings report, or QoE for short, is the test of that list. Someone who isn't the seller goes through the books and asks three questions about every dollar of profit. Is it real? Will it repeat under a new owner? Can it be proved?
What comes out the other end is the earnings figure the deal should be priced on. Sometimes it matches the seller's number. Often it doesn't.
How it's different from an audit or a tax return
A tax return is built to pay as little tax as legally possible. It usually makes a business look less profitable than it is.
An audit checks that the books follow accounting rules. It doesn't ask whether the profit will still be there after the owner walks out the door.
A quality of earnings report asks exactly that. It cares about what you're buying, not whether the books are tidy. A business can pass an audit and still fail a QoE, because the earnings depended on one customer, one owner, or one good year.
What it looks at
On the deals we run, the report comes down to a few things:
- Every add-back the seller claimed. Each one has to be documented. The ones that can't be proved come out of earnings.
- Whether revenue will repeat. Customer concentration, contracts that end, a big job that won't happen again.
- Cash against the books. Does the money that hit the bank match the profit on paper?
- What the business needs to keep running. If the owner is the only estimator or the only license holder, the buyer has to pay someone to do that job. That cost goes back in.
None of this is exotic. It's just work most buyers never see done properly, because most people in this part of the market have never run a real process.
What it costs, and why one is rarely enough
On a small business, a quality of earnings report runs about $20,000 to $40,000. On an SBA deal, the bank either orders one and charges you up front, or you pay an approved firm yourself. Either way, you pay it whether the deal closes or not.
Here's the part nobody puts in the brochure. We do more than 50 of these a year, on both sides of the table. About 60 to 65 percent of the deals we check go on to close. The other third or so never get there.
So if you're buying your first business, expect to pay for two or three reports before one sticks. That's $60,000 to more than $100,000 spent before you own anything.
That's why we run the quality of earnings on every deal before it ever reaches a bank, and why it's included in what our buyers already pay us. We've had buyers need three or four. It cost them nothing extra. We go through the SBA side of that math in using an SBA loan to buy a business.
When you need one
If the SBA is lending on a purchase of $3 million or more, you need one. For loans numbered from October 1, 2026, the lender has to get a quality of earnings report on top of the valuation. And the lender has to use the report's earnings, not the seller's, to decide how much debt the business can carry. If the report trims the add-backs, the loan shrinks with it. We cover the rule change in what SOP 50 10 8.1 means for buyers and sellers.
Below $3 million, you should get one anyway. Will says it on almost every buyer call: "You should have a quality of earnings done whether it's a $3 million purchase or a $1 million purchase." A smaller deal isn't a smaller risk to you. It's usually most of what you have.
Our job is to tell you not to buy the wrong business. A quality of earnings is how we find out which one it is before your money is in it.
What happens when it comes back different
It usually goes one of three ways.
- The numbers hold. The deal goes to the bank with earnings everyone has already tested. That's the fastest path to a close.
- The numbers come in lower. You renegotiate the price to the real earnings, or restructure part of it as a seller note or an earn-out tied to performance.
- The numbers don't hold at all. You walk away and go back to the search. It costs a report. It doesn't cost you the business.
Here's one of ours. On the seven Orangetheory studios we bought for a first-time buyer in Arizona, we started at $750,000. The quality of earnings came back less, so we had to renegotiate the price. The deal still closed. The full story is in our Orangetheory case study.
The math is why it matters. A buyer pays a multiple of earnings. On a business selling at three times earnings, every $50,000 of profit that doesn't survive the report is $150,000 off the right price. Our Colorado HVAC deal sold for $1.99 million on $650,000 of earnings, about 3.1 times, because the earnings were clean enough to prove.
If you're the one selling
The buyer's report is going to happen. The only question is whether you see the numbers first.
Most owners we talk to have books built to pay less tax, which means the real earnings are higher than the return shows. That's good news, but only if every add-back is documented before a buyer's accountant starts asking. The ones you can't prove come off your price times the multiple.
On our sell-side work, we run the quality of earnings before the business goes to a buyer's bank. The price everyone agrees to is then a price that survives underwriting, and the deal doesn't fall apart late after you've already turned other buyers away. How that fits into a sale is in how to sell your business, and how buyers turn earnings into a price is in how much is your business worth.
How long it takes
On our deals, a quality of earnings takes about two to four weeks to complete. And no deal we're part of goes forward or closes without one in some form.
It runs inside the window between a signed offer and closing, so it's one of the things that sets your closing date. Our last five buy-side closings took 71 to 118 days from signed offer. The dates are in how long it takes to buy a business.
Frequently asked questions
What is a quality of earnings report?
An independent review of whether a business really earns what the seller says. It tests every adjustment to profit and produces an earnings figure a buyer and a lender can price and lend against.
How much does a quality of earnings report cost?
About $20,000 to $40,000 on a small business. The buyer usually pays, either directly or through the bank, and pays it whether the deal closes or not. We include it in what our buyers already pay us.
Is a quality of earnings report required for an SBA loan?
Yes, on purchases of $3 million or more, for loans numbered from October 1, 2026. The lender must also use the report's earnings to size the loan.
What's the difference between an audit and a quality of earnings report?
An audit checks that the books follow accounting rules. A quality of earnings report checks whether the profit is real and will repeat under a new owner. One is about the books. The other is about what you're buying.
How long does a quality of earnings report take?
About two to four weeks on our deals. It runs between the signed offer and closing, so it's one of the things that sets the closing date.
Do I need one if I'm buying a business under $3 million?
The SBA doesn't require it, but we'd get one. About a third of the deals we check don't close, and finding that out after closing costs far more than the report.
Looking at a business and not sure the numbers hold? Talk to us before you sign.
