Do you need a quality of earnings report to buy a small business?

When exactly is a QoE required?

Under SOP 50 10 8.1, which applies to loans that receive an SBA loan number on or after October 1, 2026, the rule is specific:

• It applies to two of the four change-of-ownership categories: Initial Acquisitions and Business Expansions.
• It applies when the business purchase price is $3 million or more. Owner-occupied real estate is excluded from that figure.
• The lender commissions it, and it must be independent.
• QoE earnings are used in the coverage calculation. For an initial acquisition the floor is 1.25x; for a business expansion it is 1.15x.
• It is not required for Owner Buyouts or ESOP and cooperative transactions.

Outside SBA lending, there is no rule. Equity investors and conventional lenders set their own requirements. Ask early, because a QoE commissioned for you may not satisfy them, and paying for two is a waste.

What does a QoE check that your CPA's review does not?

A QoE is not an audit. It does not give an opinion on the financial statements. It answers a narrower question: what does this business really earn, on a repeatable basis?

• Add-backs. Each adjustment to earnings is tested against documents. Recurring "one-time" costs are put back.
• Proof of cash. Revenue is tied to bank deposits.
• Owner compensation. The owner's pay is replaced with a market salary for the role.
• Revenue quality. Customer concentration, churn, one-off projects and timing of revenue recognition.
• Working capital. What level of receivables, inventory and payables the business needs. This feeds a working capital target in the purchase agreement.
• Accounting basis. Cash-basis books are often converted to accrual to show true monthly earnings.

A general CPA review may cover some of this. The difference is focus and independence. A lender can rely on a QoE from an independent firm. It may not rely on a review by the buyer's own accountant.

What does a QoE cost?

Ranges depend on the size of the business and the state of its books.

• A survey of deal costs with a median deal size of about $4 million found a median QoE cost of $40,000.
• The same survey found "QoE-lite" engagements under $10,000.
• Proposals for QoE work on SBA deals have ranged from $7,500 to over $30,000.
• Total deal costs, including legal and QoE, came to about 2% of the purchase price in that survey.

On an SBA deal where the lender commissions the report, ask who pays and whether the cost can be included in the project costs. Fees generally count in total project costs, the base the 10% equity injection is measured against.

Should you get a QoE when the deal is under $3 million?

It depends on what could go wrong and how much it would cost you. A reasonable approach, by situation:

• Probably skip a full QoE if the tax returns support the listing earnings, add-backs are few and documented, revenue ties to the bank, and no customer is a large share of sales. Do your own proof of cash and have a CPA review the add-backs.
• Get a QoE-lite if the books are reasonable but add-backs are a meaningful part of earnings or the business carries inventory.
• Get a full QoE if the books are cash-basis and messy, add-backs are large, revenue is lumpy, or you are bringing in outside investors who will want an independent number.

There is also a reason tied to what you do next. If you plan to use this business as the base for more acquisitions, a QoE gives you a clean starting set of numbers. A future auditor, lender or investor will ask for that baseline.

What happens if the QoE comes in lower than the seller's number?

The QoE number drives both price and financing. The worked example below uses illustrative figures.

1. Price: $3.5 million. Seller's adjusted EBITDA, after a market salary for a manager: $900,000. Implied multiple: 3.89x.
2. The QoE finds $780,000 of supportable EBITDA. At the same 3.89x, the business is worth about $3.03 million.
3. Assume the independent valuation agrees with $3.03 million. Total debt is capped at the appraised value.
4. Project costs: $3.5 million plus an assumed $150,000 of fees and working capital = $3.65 million.
5. Maximum debt: $3.03 million. Buyer cash needed: $3.65 million minus $3.03 million = about $620,000, instead of the $365,000 a 10% injection would have required.

You then have three options: ask for a price cut of about $470,000, find the extra cash, or walk. A seller who disputes the QoE can commission a competing analysis, but the lender will use its own. See when to renegotiate and when to walk away.

Where these numbers come from: SBA QoE rule, coverage ratios and valuation cap from this guide to SBA SOP 50 10 8.1, FunderIntel and Cantrell Firm. Cost figures from the Big Deal Small Business deal cost survey and Searchfunder's note on the new SBA QoE requirement. SOP 50 10 8.1 applies to loans numbered on or after October 1, 2026; lender practice under it is still settling and these are secondary summaries, so confirm current terms with your SBA lender.

Related questions

Can the seller's QoE replace the lender's?

Not for a required SBA QoE. The rule calls for an independent report commissioned by the lender. A seller-side QoE can still help you decide whether to make an offer.

Is a QoE the same as an audit?

No. An audit gives an opinion on whether financial statements follow accounting standards. A QoE analyzes repeatable earnings for a transaction. If the company later goes public, it will need audited statements as well.

When in the deal should the QoE start?

After the cheap deal-killers are cleared, usually in the first weeks after the LOI. Starting earlier wastes money if the deal dies over the lease or a license. Starting later squeezes the 30 to 60 days typically allowed for diligence.

Does the $3 million threshold include working capital?

The rule refers to the business purchase price, excluding owner-occupied real estate. How a given deal's price is measured is a question for your lender.

What comes next

A QoE tells you what the business earns. It does not tell you whether those earnings survive the seller's departure. The next question is how do you know whether a business can run without its owner?

Related articles

• How do you verify that a seller's numbers are real?
• What is on a due diligence checklist for buying a small business?
• Which add-backs are legitimate, and which should you question?
• What do lawyers and accountants cost when you buy a business?
• What are the SBA 7(a) rules for buying a business, as of October 2026?

Meraki Dealmakers is a service of Meraki Partners, LLC, an advisory firm. It is not a broker-dealer, investment adviser, business broker, law firm or accounting firm. This article is general information, not legal, tax or investment advice.