Quality of Earnings (QoE): Complete Guide for Small Business Acquisitions

A Quality of Earnings report, or QoE, is transaction-focused financial due diligence that analyzes how reliably a business’s reported earnings reflect its underlying economic performance. In a small business acquisition, a QoE commonly examines revenue, expenses, EBITDA adjustments, working capital, cash conversion, customer concentration, and other factors that can affect sustainable earnings and valuation.

A QoE is not an audit and does not provide an audit opinion on a company’s financial statements. It also is not a single standardized product: the scope, procedures, deliverables, and terminology vary among providers and transactions. Financial statement audits are governed by separate professional auditing standards and serve a different purpose from transaction-oriented financial diligence. For background on financial statement auditing standards, see the AICPA’s audit and assurance resources.

Quality of Earnings at a Glance

What Is a Quality of Earnings Report?

A Quality of Earnings report is a form of financial due diligence used to understand the economic performance of a business beyond the headline numbers shown on its income statement or tax returns.

For an acquisition buyer, the central question is usually not simply, “Did the company report this amount of profit?” It is: What level of earnings does the historical financial information actually support, and what issues should I understand before relying on those earnings in this transaction?

That distinction matters because privately held companies frequently contain expenses, revenue items, accounting classifications, owner compensation, related-party arrangements, and other items that require interpretation before a buyer can compare reported earnings with the economics expected under new ownership.

A QoE provider may therefore reconcile several versions of the company’s financial information and analyze the adjustments that bridge reported results to an adjusted earnings figure.

QoE Is Broader Than Checking the Math

A useful QoE does more than recalculate EBITDA.

Depending on scope, it may investigate:

• whether revenue recorded in a period is supported by underlying activity;
• whether revenue is recurring, project-based, seasonal, concentrated, or otherwise vulnerable;
• whether claimed EBITDA or SDE add-backs are supportable;
• whether expenses have been omitted, deferred, capitalized, or characterized as non-recurring;
• whether owner compensation needs normalization;
• whether related-party expenses reflect arm’s-length economics;
• whether working capital requirements are consistent with the seller’s presentation;
• whether earnings translate into cash; and
• whether trends in accounts receivable, inventory, payroll, gross margin, or customer mix warrant additional diligence.

The exact scope should be defined in the engagement letter. There is no universal checklist that every provider must follow.

QoE Is Not an Audit

This is one of the most important distinctions.

An audit is an assurance engagement performed under applicable professional standards for the purpose of expressing an opinion on financial statements. A QoE is generally performed for a transaction-specific diligence purpose.

The fact that a CPA firm performs a QoE does not convert the engagement into a financial statement audit.

Similarly, the names “Lite QoE,” “Mini QoE,” and “Full QoE” are not standardized industry definitions. One provider’s “Lite” scope may resemble another provider’s standard engagement. Buyers should compare the actual procedures, periods covered, deliverables, and exclusions rather than relying on the label.

For a deeper comparison of narrower and broader diligence scopes, see Lite Scope vs. Full Scope Quality of Earnings.

What Does a QoE Analyze?

The scope varies, but most transaction-oriented QoE work centers on several core financial questions.

Not every QoE includes every procedure above. Commercial diligence, legal diligence, tax diligence, IT diligence, cybersecurity reviews, HR diligence, environmental reviews, and operational diligence remain separate workstreams unless they have explicitly been added to the provider’s scope.

Reported EBITDA vs. Adjusted EBITDA

One of the principal outputs is often an analysis of adjustments to reported earnings.

Consider a business reporting $1.2 million of EBITDA. Management argues that the following should be added back:

• $150,000 of owner compensation;
• $80,000 of legal expenses;
• $60,000 of personal expenses; and
• $100,000 associated with a discontinued location.

The question is not whether those expenses appear in the general ledger. The question is whether each adjustment is economically supportable for the transaction.

For example, eliminating the owner’s compensation may be inappropriate if the buyer must hire a $140,000 general manager after closing. The economically relevant adjustment might be only $10,000 rather than $150,000.

This type of normalization can materially change the earnings figure used in valuation discussions.

Revenue Quality

Revenue analysis is equally important.

A business can report growing revenue while underlying economics weaken because:

• a major customer represents a growing percentage of sales;
• recent growth came from one unusually large project;
• discounts accelerated revenue into the pre-closing period;
• customer churn increased;
• gross margins deteriorated; or
• acquired or non-recurring revenue was presented alongside organic performance.

QoE providers therefore often analyze revenue and gross profit by month and by whatever dimensions the underlying data supports.

QoE vs. Financial Due Diligence vs. Proof of Cash

These terms overlap, which can make provider comparisons confusing.

In practice, QoE is often a major component of financial due diligence, not a completely separate concept.

Some SMB buyers need a narrower engagement because the target maintains limited accounting records or because the principal question is whether reported revenue is supported by cash activity. In those situations, a focused financial verification or Proof of Cash engagement may be more appropriate than a broad QoE.

For more detail on the broader diligence workstream, see Financial Due Diligence in Small Business Acquisitions.

Proof of Cash Becomes Particularly Important Under the New SBA Rules

SBA SOP 50 10 8.1 expressly defines a Cash Proof for transactions subject to its new QoE requirement. Appendix 15 requires the analysis to reconstruct cash receipts and disbursements by reconciling bank statement data to the income statement and tax return for the relevant periods. For an SBA-required QoE, the Cash Proof must cover both the trailing 12 months and the last two fiscal years.

That is an SBA requirement for the transactions covered by the rule, not a statement that every privately commissioned QoE must follow the same procedure.

How Much Does a Quality of Earnings Report Cost?

QoE pricing varies substantially because the term describes a category of work rather than a standardized product.

Scope, business complexity, data availability, number of legal entities or locations, reporting quality, historical periods, transaction deadlines, and requested deliverables can all affect the fee.

DueDilio Marketplace Pricing Data

Based on 110 comparable QoE and financial-diligence proposals submitted through the DueDilio marketplace across 17 multi-bid SMB and lower-middle-market projects:

These figures require several qualifications.

They are:

• proposal prices submitted through the DueDilio marketplace;
• drawn from SMB and lower-middle-market projects represented in that dataset;
• based on 110 comparable proposals across 17 projects;
• not an industry-wide pricing survey;
• not a statement that every proposal became an engagement; and
• not a measure of the final amount ultimately paid on completed engagements.

Proposal data and confirmed-engagement pricing should not be mixed.

What Increases QoE Cost?

A provider may quote more when the target has:

• multiple operating entities;
• several locations;
• weak or incomplete bookkeeping;
• significant cash-basis-to-accrual adjustments;
• complex revenue recognition;
• substantial inventory;
• large volumes of customer-level transactional data;
• international activity;
• carve-out financials;
• significant related-party transactions;
• unusually compressed deadlines; or
• extensive working-capital or balance-sheet analysis.

Conversely, a well-maintained single-entity service business with clean accounting data and a narrowly defined scope may require less work.

The better comparison is therefore not simply, “Which provider has the lowest fee?”

It is: “What analysis and deliverables am I receiving for this fee?”

For additional pricing context, see How to Get an Affordable Quality of Earnings Report. When comparing specific firms or practitioners, use the framework in How to Compare Quality of Earnings Providers.

How Long Does a QoE Take?

There is no mandatory QoE timeline.

For planning purposes, SMB transaction participants often reserve a few weeks for financial diligence once the provider has received usable data. A relatively clean engagement can move faster; a complex engagement or incomplete data room can take materially longer.

The largest drivers of timing are usually:

1. Data readiness. The provider cannot efficiently analyze information that has not been delivered.
2. Accounting quality. Reconciliations take longer when financial statements, general ledgers, tax returns, and bank records do not align.
3. Responsiveness. Follow-up questions can become the critical path.
4. Scope. A focused earnings analysis requires less work than an engagement covering detailed working capital, customer cohorts, inventory, cash proof, and multiple legal entities.
5. Changes in scope. New findings frequently generate additional requests.
6. Deal deadlines. Providers may be able to accelerate certain engagements, but a compressed schedule should not be assumed.

A Better Way to Manage the Timeline

Instead of relying on a generic “two-week” or “four-week” promise, ask the provider to identify:

• kickoff date;
• initial information requirements;
• when fieldwork can begin;
• whether preliminary findings will be shared before the final report;
• expected management-question cadence;
• target draft date;
• target final-report date; and
• assumptions that could delay completion.

For a broader view of how financial diligence fits into the post-LOI period, see Post-LOI Due Diligence: 60-Day Timeline & Checklist.

When Should a Buyer Get a QoE?

A QoE is most commonly commissioned after a buyer has enough conviction to invest meaningful diligence resources—often after an LOI is signed—but before the buyer is irrevocably committed to the transaction.

It becomes particularly useful when valuation depends heavily on EBITDA, SDE, or another earnings measure that requires normalization.

Situations Where a QoE May Be Especially Valuable

A buyer should consider deeper financial diligence when:

• the purchase price is based on a multiple of adjusted EBITDA or SDE;
• the seller proposes numerous or subjective add-backs;
• bookkeeping is primarily cash basis;
• tax returns and internal financial statements differ materially;
• recent earnings improved sharply;
• the business has meaningful seasonality;
• customer concentration is high;
• revenue is project-based or unusually volatile;
• the business carries material inventory;
• working capital will matter to the purchase agreement;
• related-party transactions are significant;
• one owner performs substantial unpaid or below-market work;
• the company has multiple entities or locations; or
• the financing source expects independent financial diligence.

When a Full QoE May Be Excessive

Not every small acquisition requires the same level of analysis.

For a very small or straightforward transaction, a buyer may decide that targeted financial diligence provides enough information relative to the transaction size and risk.

Potential alternatives include:

• Proof of Cash;
• targeted financial verification;
• review of tax returns and IRS transcripts;
• general-ledger analysis;
• a limited earnings normalization exercise;
• working-capital analysis; or
• a customized financial diligence scope.

The objective should be to match the diligence effort to the financial questions that could change the buyer’s decision or transaction terms, rather than ordering a particular report because of its label.

SBA Quality of Earnings Requirements for Business Acquisitions

SBA-financed acquisitions require special care because SBA requirements, individual lender practices, and ordinary buy-side diligence are not the same thing.

The U.S. Small Business Administration issued SOP 50 10 8.1 in August 2026, with the new provisions taking effect October 1, 2026. The updated SOP includes a dedicated Appendix 15 covering changes of ownership.

Does Every SBA Business Acquisition Require a QoE?

No.

Under Appendix 15 of SBA SOP 50 10 8.1, the lender must obtain a QoE for:

• an Initial Acquisition; or
• a Business Expansion

when the Business Purchase Price is equal to or greater than $3 million.

Owner Buyout and ESOP & Cooperative transactions are not subject to this particular QoE requirement.

This should not be restated as “SBA requires a QoE on acquisitions over $3 million” without the transaction-category qualification.

What Does “Business Purchase Price” Mean?

For this purpose, SBA defines Business Purchase Price as the price established by the purchase-and-sale agreement less the portion attributable to owner-occupied commercial real estate being acquired, with that real estate portion established by its appraised value.

The financial-diligence threshold is not reduced by:

• buyer equity;
• seller debt; or
• another financing source.

In other words, the relevant calculation is not simply the SBA loan amount.

What Must the SBA-Required QoE Cover?

Appendix 15 states that the QoE must examine the reliability, sustainability, and accuracy of historical and projected earnings and must reconcile specified financial records to develop a normalized adjusted earnings figure.

The SOP specifically calls for analysis that includes:

• accountant-prepared financial statements;
• tax returns;
• internal financial statements;
• IRS transcript information;
• add-backs and adjustments;
• non-recurring revenue and expenses;
• owner compensation;
• related-party transactions;
• deferred maintenance;
• cash-basis vs. accrual-basis differences;
• customer concentration;
• contract continuity; and
• sustainability of revenue and margins after the sale.

It also requires the Cash Proof discussed earlier.

The lender is required to use the earnings generated by the QoE in its debt-service-coverage determination.

Who Commissions the SBA QoE?

This is a major departure from the usual buyer-commissioned diligence model.

Appendix 15 requires the QoE to:

• be performed by an independent, experienced financial professional;
• be conducted for the benefit of the lender; and
• not be prepared by or for the borrower or seller.

Therefore, a buyer cannot assume that a QoE commissioned independently for acquisition diligence will satisfy the SBA requirement.

Buyer QoE vs. Lender QoE: Not Necessarily Interchangeable

A buyer may commission a QoE because the buyer wants to decide whether to:

• proceed with the acquisition;
• renegotiate price;
• challenge an add-back;
• adjust working capital;
• revise deal structure; or
• walk away.

The SBA lender’s report is performed for a different stakeholder and, when Appendix 15 applies, must satisfy SBA-prescribed requirements.

A buyer-commissioned report can therefore be useful even when a second lender-directed QoE will later be required.

Buyers should discuss this with their lender early in an SBA-financed transaction, particularly if the purchase price is near or above the $3 million threshold.

A lender may also impose additional underwriting or documentation requirements beyond the minimum requirements discussed here. Those are lender-specific practices, not necessarily universal SBA mandates.

For additional background on SBA acquisition financing, see SBA vs. Conventional Loans: Why Buyers Choose 7(a).

Buy-Side vs. Sell-Side QoE

A QoE can be commissioned by either side of an M&A transaction, but the objectives differ.

Why Sellers Commission QoE Work

A seller may conduct financial diligence before going to market to:

• identify unsupported adjustments;
• reconcile accounting inconsistencies;
• prepare customer and margin analyses;
• understand likely buyer concerns;
• address working-capital issues;
• reduce surprises after an LOI; and
• provide buyers with a more organized financial package.

A sell-side QoE does not force a buyer to accept the seller’s adjusted EBITDA or eliminate the buyer’s right to perform its own diligence.

Its value is primarily in preparation and transparency, not in making the numbers unquestionable.

Example: How QoE Findings Can Affect a Deal

Illustrative example — not an actual DueDilio transaction.

A buyer signs an LOI to acquire a home-services company.

The seller reports:

• Revenue: $6.5 million
• Adjusted EBITDA: $1.0 million
• Proposed purchase multiple: 5.0x
• Implied enterprise value: $5.0 million

The seller’s adjusted EBITDA includes several add-backs.

After considering these items, the buyer may conclude that a more supportable earnings figure is approximately $690,000, rather than $1 million.

That does not automatically mean the business is worth $3.45 million or that the purchase price must fall by a particular amount.

The buyer still needs to consider:

• which valuation multiple is appropriate;
• whether the customer loss is permanent;
• whether replacement management truly costs $150,000;
• whether deferred maintenance is recurring expense, capital expenditure, or a transaction adjustment;
• the working-capital mechanism;
• strategic value;
• competitive bidding;
• financing capacity;
• seller financing; and
• deal structure.

The QoE informs the negotiation. It does not dictate the final answer.

Common QoE Red Flags

A “red flag” does not necessarily mean the buyer should abandon a transaction. It means an item deserves explanation, quantification, or additional diligence.

Add-Backs Deserve Particular Scrutiny

Many SMB transactions are marketed using adjusted EBITDA or SDE.

That is not inherently problematic. Closely held businesses often contain legitimate owner-specific or transaction-specific expenses.

The mistake is treating the seller’s adjustment schedule as automatically correct.

A useful diligence process asks, for every material adjustment:

1. Did the expense or revenue actually occur?
2. Is it truly non-recurring?
3. Will it disappear after closing?
4. Will the buyer incur a replacement cost?
5. Is the amount supported by underlying documentation?
6. Has the adjustment been applied consistently across periods?

How to Choose a QoE Provider

Selecting a QoE provider should begin with the scope, not the logo on the proposal.

1. Compare Procedures, Not Labels

Do not assume that “Full QoE,” “Mini QoE,” or “Lite QoE” means the same thing across firms.

Ask what is actually included:

• historical periods;
• TTM analysis;
• EBITDA normalization;
• revenue analysis;
• customer concentration;
• gross-margin analysis;
• working capital;
• Proof of Cash;
• bank-statement testing;
• tax-return reconciliation;
• balance-sheet analysis;
• debt-like items;
• management interviews;
• written report;
• data book or schedules; and
• post-report calls.

2. Look for Relevant Transaction Experience

A technically capable accountant may not necessarily specialize in acquisition diligence.

Relevant experience can help a provider understand:

• the questions buyers need answered before closing;
• purchase-price implications;
• add-back disputes;
• working-capital mechanics;
• lender information requirements; and
• the pace and communication style of M&A transactions.

3. Consider Industry Fit

Industry expertise becomes more important when financial analysis depends on specialized operating data.

Examples include:

• construction work-in-progress;
• healthcare reimbursement;
• SaaS recurring revenue;
• e-commerce inventory and channel reporting;
• multi-location businesses; and
• project-based professional services.

4. Understand Who Will Do the Work

Ask who will:

• lead the engagement;
• perform the analysis;
• interact with management;
• review the work; and
• present the findings.

The senior person on the sales call is not always the person performing the majority of the diligence.

5. Ask How Issues Will Be Communicated

Waiting until the final report to hear about a potentially material issue can be inefficient.

Understand whether the provider will:

• flag significant findings as they arise;
• hold interim calls;
• maintain an issues list;
• discuss findings with management; and
• provide preliminary EBITDA observations.

6. Compare Fees in Context

A $9,000 proposal and a $15,000 proposal are not necessarily competing products if one includes a substantially wider scope.

Compare the engagement letters line by line.

For a full provider-selection framework, see How to Compare Quality of Earnings Providers.

What Documents Will the Provider Need?

The exact request list varies by company and scope.

Core Financial Records

• monthly income statements;
• monthly balance sheets;
• general ledger detail;
• trial balances;
• federal and state tax returns;
• IRS transcripts where relevant;
• bank statements;
• accounts receivable aging;
• accounts payable aging;
• inventory reports; and
• fixed-asset schedules.

Revenue Information

• customer-level sales;
• invoices;
• contracts or statements of work;
• recurring-revenue schedules;
• backlog;
• deferred-revenue information; and
• churn or retention reports where relevant.

Expense and Payroll Information

• payroll registers;
• owner compensation;
• employee roster and compensation;
• related-party expenses;
• rent and lease information;
• professional fees;
• insurance; and
• unusual or non-recurring expense support.

Transaction-Specific Information

• seller’s adjusted EBITDA or SDE schedule;
• proposed add-backs;
• purchase agreement or LOI where relevant;
• working-capital calculations;
• debt schedule;
• management forecast or budget; and
• organizational chart and legal-entity structure.

A clean, organized data room can materially improve the process.

A long request list does not mean every document is relevant to every acquisition. Providers should tailor requests to the business and diligence objectives rather than mechanically requesting information that will not be analyzed.

What a QoE Does Not Replace

A strong QoE can answer important financial questions, but it is only one workstream in acquisition diligence.

Legal Due Diligence

A QoE does not replace legal review of:

• contracts;
• ownership;
• litigation;
• permits;
• regulatory matters;
• intellectual property;
• employment agreements; and
• transaction documents.

Tax Due Diligence

Financial diligence may identify tax-related issues, but a buyer may still need specialized tax analysis covering:

• income tax exposure;
• sales and use tax;
• payroll tax;
• transaction structure;
• tax elections;
• nexus; and
• historical compliance.

Commercial Due Diligence

A QoE can quantify customer concentration and historical trends, but it does not necessarily answer:

• How large is the market?
• Is the company gaining share?
• How strong are competitors?
• Will customers stay after closing?
• Is pricing sustainable?
• Is the market growing or shrinking?

Operational Due Diligence

Historical margins alone will not establish whether:

• equipment is in good condition;
• staffing is adequate;
• workflows are efficient;
• vendors are stable;
• safety processes are appropriate; or
• facilities require investment.

Technology and Cybersecurity Diligence

Financial statements cannot determine whether:

• software architecture is maintainable;
• cybersecurity controls are adequate;
• licenses are valid;
• technical debt is material; or
• systems can scale.

Business Valuation

A QoE may produce an adjusted earnings figure that is highly relevant to valuation, but it is not itself necessarily a business valuation.

Valuation still requires judgments about:

• multiples;
• comparable transactions;
• risk;
• growth;
• cost of capital;
• asset values;
• strategic value; and
• market conditions.

The broader diligence plan should therefore be built around the risks of the specific transaction. DueDilio’s M&A Due Diligence services overview describes the major diligence specialties, while Buying a Business: Who Do You Need on Your Deal Team? explains how financial diligence fits alongside other acquisition advisors.

The Bottom Line

A Quality of Earnings report helps a buyer move from reported earnings to a more informed view of the target’s underlying financial performance.

A well-scoped engagement can help answer questions such as:

• Which EBITDA or SDE adjustments are supportable?
• How reliable is recent revenue?
• Are margins changing?
• How concentrated is the customer base?
• How much working capital does the business require?
• Do accounting earnings convert into cash?
• What financial assumptions should the buyer investigate before relying on the seller’s valuation?

The most important step is not deciding whether you need something called a “QoE.” It is identifying the financial questions that could affect your acquisition decision and making sure the engagement is designed to answer them.

If you need financial diligence for an acquisition, you can explore DueDilio’s due diligence network or post a project to receive proposals from matched M&A service providers.

Related Resources

• How to Get an Affordable Quality of Earnings Report
• Lite Scope vs. Full Scope Quality of Earnings
• How to Compare Quality of Earnings Providers
• Post-LOI Due Diligence: 60-Day Timeline & Checklist
• Financial Due Diligence in Small Business Acquisitions
• Buying a Business: Who Do You Need on Your Deal Team?
• SBA vs. Conventional Loans: Why Buyers Choose 7(a)