Quality of earnings, and when it's required

The short version

• A quality of earnings report is an outside accountant's detailed check of what a business really earns.
• For SBA-financed purchases of $3 million or more, the lender must order one, under rules effective October 1, 2026.
• One you order yourself does not satisfy that requirement. It can still help you prepare.
• Below $3 million, or without an SBA loan, it is up to the buyer and their lender.
• The report tests your add-backs, your revenue and your cash. Clean books make it faster and cheaper to pass.

What a quality of earnings report is

A quality of earnings report, often called a QoE, is a close look at your earnings by an outside accountant. It is more focused than an audit. It asks one question: are the earnings a buyer is paying for real, and will they continue?

It usually covers:

• Whether revenue is recorded properly and ties to bank deposits.
• Whether each add-back holds up.
• Whether any one-time gains or losses distort the picture.
• The working capital the business needs to run: cash, what customers owe and what the business owes.
• Trends by month and by customer.

When it is required

For purchases financed with an SBA loan, rules effective October 1, 2026 (SOP 50 10 8.1) require a quality of earnings report when the purchase price is $3 million or more. The lender orders it. A report prepared by or for the seller cannot be used. If the buyer has commissioned their own, the lender can have it reviewed by one of its own vendors instead of ordering a new one. The rule applies when the buyer is new to the business, or is another business in your industry. It does not apply when existing owners, long-time employees or an employee stock ownership plan buy out an owner.

These rules apply only to buyers using SBA loans. Buyers paying cash or using conventional loans decide for themselves, often with their lender. Many buyers of larger businesses order one either way.

Should you get one yourself?

A report you order, sometimes called a sell-side QoE, will not replace the lender's. It can still be worth it:

• It finds problems first, while you have time to fix or explain them.
• It tests your add-backs before a buyer does.
• It prepares you for the questions the lender's accountant will ask.

It may not be worth it for a smaller or simpler business with clean books. Your accountant can help you decide.

How to make it go smoothly

Everything in Lesson 5.1 helps: books that tie to your tax returns, monthly detail, accrual statements and a documented list of add-backs. A well-organized data room shortens the work.