Somewhere between the letter of intent and the loan commitment, a buyer is asked to pay for a Quality of Earnings (QoE). A CPA firm's engagement on a lower-middle-market business typically costs $25,000 to $75,000, and the quote arrives when the buyer's cash is already committed to the deposit, the lawyers and the lender's charges. The question that follows is fair: what does the fee buy, and what does it leave the buyer still having to do?
This article answers it from the one place the contents of a QoE are written down as a rule: SOP 50 10 8.1, the SBA's lending rulebook, which says what the lender's report must contain on a 7(a) Initial Acquisition or Business Expansion at a Business Purchase Price of $3 million or more. That list describes any complete engagement, because the lender's analyst is the reader every QoE must satisfy.
What the engagement includes
The engagement letter sets the scope, and the scope is where the fee goes. On a lender-engaged report, SOP 50 10 8.1, Appendix 15, specifies five things.
- The reconciliation. The analysis reconciles the accountant-prepared statements, the tax returns, the internal statements and the IRS transcript data "to produce a normalized, adjusted earnings figure that reflects recurring, arm's-length operations". The report says which of the three sets of figures is real and why they differ.
- The cash proof. "A financial analysis that reconstructs cash receipts and disbursements by reconciling bank statement data to the income statement and tax return for each period under review", on a trailing twelve-month basis and on the last two fiscal years. It is the one procedure that separates a QoE from a well-documented add-back schedule: it tests whether the revenue the statements record ever reached a bank account.
- The add-backs, documented. The report "must identify and document all add-backs and adjustments to the seller's reported earnings", naming non-recurring revenue or expenses, above- or below-market owner compensation, related-party transactions, deferred maintenance and cash-basis versus accrual differences.
- The durability questions. The report assesses customer concentration, contract continuity and whether revenue and margins will hold after the sale.
- The report itself. Prepared by "an independent, experienced financial professional", which on a mandated deal "must be conducted for the benefit of the Lender" and "must not be prepared by or for the seller". Independence is a large part of what the fee buys: a buyer's own bridge is the buyer's argument, and a lender underwrites on a third party's finding.
What the report does not claim is also written on it: a QoE is not an audit, and the report says so, giving no opinion on the financial statements as a whole.
Who does each part
| Item | In the engagement | Who does it, and where that is written |
|---|---|---|
| Normalized earnings bridge, every adjustment documented | Yes | The firm. SOP 50 10 8.1, Appendix 15, names the categories the report must cover |
| Cash proof: bank statements reconciled to the income statement and the tax return | Yes, on the trailing twelve months and the last two fiscal years | The firm. The procedure the SOP specifies and the one a buyer cannot stand in for |
| Customer concentration, contract continuity, revenue and margin sustainability | Yes, as an assessment | The firm. Pricing the risk is the buyer's |
| Business valuation | No | A separate engagement. The SOP requires the QoE "in addition to the required Business Valuation" |
| The coverage test | No | The lender. "The Lender must use the earnings from the QoE in the Debt Service Coverage (DSC) determination", then makes its own adjustments |
| The working capital peg and the closing adjustment | No | The purchase agreement. The reconciled statements are inputs to that negotiation, not the peg |
| The deal model: price, structure, equity, what happens if earnings fall | No | The buyer, on the report's earnings |
| The investment memo and the narrative | No | The buyer, for the investor |
Two of the rows marked No are where buyers most often expect more than they bought. The lender's view: the report's normalized earnings are the start of the lender's arithmetic, not the end. The lender makes its own adjustments to reach the ratio it underwrites on, and under SOP 50 10 8.1 each adjustment to the coverage ratio needs a written justification in the credit memorandum, without which it "will be ineligible". The QoE firm does not write that memorandum. And the narrative: the report is written for a credit file. The investor memo, which explains why the adjustments are right and what the buyer will do about the concentration the report found, is the buyer's document. No firm writes it.
When a buyer still needs one
The rule first. Since 1 October 2026, on an SBA 7(a) Initial Acquisition or Business Expansion with a Business Purchase Price of $3 million or more, the lender "must also obtain a Quality of Earnings (QoE) in addition to the required Business Valuation" (SOP 50 10 8.1, Appendix 15). The threshold is the price in the purchase agreement less the appraised value of any owner-occupied real estate, before buyer equity or seller debt is applied, so the structure cannot lower it. The report is performed for the lender, must not be prepared by or for the seller, and the lender must use its earnings in the coverage test. A report the buyer commissioned earlier is not wasted: the lender "may elect to have that report reviewed by one of their approved vendors". The full rule, with the four transaction types and the coverage floors, is in our explainer on SBA 7(a) acquisitions after 1 October 2026.
Below that price the SBA mandates no report, and three things decide it.
- The lender's policy. A lender may require a QoE at any price; its credit policy decides, not the SOP. Ask before the fee is quoted, and ask who the report must be prepared for.
- The investors. An equity partner funding the deposit can set the condition the SBA did not.
- The buyer's own findings. A bridge built with evidence tells the buyer how much of the seller's figure survives, but not whether the recorded revenue reached the bank. When the books are internal, the returns show less than the statements, or a large share of sales is cash, that is the cash proof's question, and it is worth the fee at any price.
What preparation changes
Nothing a buyer does beforehand changes the procedures the SOP requires. What preparation changes is what the report finds, and what the finding costs the deal.
Two buyers, same business, same report. The first hands the firm the broker's schedule and a data room; the firm builds the bridge from nothing, and the deductions the schedule left out are the report's discoveries. The second hands the firm a bridge with the ledger reference and the document behind each line, the deductions already taken, and a bank tie the buyer ran on the trailing twelve months; the firm tests instead of builds, and the findings arrive as confirmations and one or two differences the buyer can argue from the same evidence.
The difference is where the finding lands. A below-market owner salary found by the buyer in week two is a line in the model and a point in the price negotiation. The same salary found by the lender's report in week ten is a reduction in the earnings the lender must underwrite on, and under SOP 50 10 8.1 the remedy is arithmetic: if coverage on the report's earnings "does not support the business valuation and proposed debt structure, the loan amount must be reduced accordingly", with additional equity the permitted way to close the gap. The fee bought the finding either way. Preparation decides who reads it first.
A worked example
Every figure in this section is a worked example; the fee is the low end of the typical range, and the multiple is an assumption, not a market figure. A buyer agrees to pay $3.6M for a commercial cleaning company with no real estate, so the Business Purchase Price is $3.6M and the lender must obtain a QoE. Reported EBITDA is $700K. The broker's schedule adds back $320K: the owner's full salary of $270K, $35K of legal fees from a settled dispute and $15K of bad debt labelled one-time. It prints adjusted EBITDA of $1,020K, and the price is about 3.5× that figure.
Buyer A sends the broker's schedule to the firm. Buyer B first builds a bridge from the ledger:
+ owner salary above a replacement general manager ($270K less $150K) $120K
+ legal fees, matter settled, per the agreement $35K
+ personal share of vehicle costs, per the log $10K
− premises rented from the owner's company below market ($126K less $96K) $30K
= Normalized EBITDA $835K
Left out: the $15K of bad debt, which appears in each of the last three years.
Then the lender's report, at $25,000, on the same business. It reconciles the statements to the returns and reaches the same four adjustments Buyer B found. Its cash proof finds $25K of recorded revenue in the trailing twelve months that the bank statements do not support, and takes it out. Normalized earnings in the report: $810K.
For Buyer B, the report moved the figure by $25K, 3 percent, and the one finding was the one no bridge could have made, because it needed the bank statements. The fee bought the cash proof and a third party's name on a figure the buyer already had. For Buyer A, the same report moved the figure by $210K, 21 percent of what the price was built on: $735K of price at the assumed 3.5×, and a loan sized to earnings a fifth smaller than the ones in the buyer's model, because the lender must underwrite on $810K and not $1,020K. The report cost the same. What differed was who found the $210K, and when.
Educational guide, not advice. This guide is general information, not investment, legal, tax, accounting, lending or valuation advice. Rules, ratios, prices and worked figures are stated as of the date shown, are drawn from public sources and our own experience, and can be out of date or wrong; they are not a substitute for a lender's, regulator's or program's current rules. Verify any figure with its primary source and a qualified professional before acting on it.
How Acquiror AI does this
The Quality of Earnings workbench in Acquiror AI is where Buyer B's bridge is built: a period with its reported EBITDA and SDE, one adjustment per line with a category, a recurrence and a confidence level, the ledger reference and the document attached to the adjustment, a support status that says whether the evidence is sufficient, and a lock on the period once each line is approved or rejected. The locked figure is the one Valuation, Financing and the investment memo read, and the memo carries an evidence appendix a reader can reconcile to the seller's schedule line by line. On every deal the workbench is preparation and check. On a 7(a) Initial Acquisition or Business Expansion at a Business Purchase Price of $3 million or more, the lender's engagement is required and the workbench does not replace it: the cash proof is the QoE firm's work, and the workbench is where you build and lock the figure that proof will be checked against, so the report confirms your number instead of replacing it. When the report arrives, its adjustments go in as evidence beside yours. Below that price the SBA mandates no report; the workbench is where you build and test the bridge a lender will read. Where a per-deal AI report fits instead, and where it does not, is set out in Acquiror AI vs. per-deal QoE reports.
The takeaway
The fee buys the reconciliation, the cash proof and an independent name on the figure. It does not buy the model, the lender's adjustments, the peg or the memo, and it does not buy the figure itself: a buyer who walks in without one pays the firm to discover what the lender will underwrite on, instead of paying it to confirm. Build the bridge first, and let the engagement do the part only it can do. Every term in this article is defined in the glossary.