Quality of Earnings Reports: Why They’re Worth It

A quality of earnings (QoE) report is one of the most valuable tools in a buyer’s due diligence toolkit. Unlike basic financial statement reviews, QoE reports delve into the sustainability of a business’s earnings, adjusting for anomalies, one‑time events and accounting irregularities. But how much should you budget for a QoE report—and why does it matter? In this post, we break down the costs, factors that influence pricing and the reasons a QoE can save you money in the long run, especially when obtaining an SBA loan.

What Is a Quality of Earnings Report?.

A QoE report is prepared by an independent accounting firm and evaluates a company’s true earnings power. It adjusts EBITDA for non‑recurring expenses and revenue, examines working capital requirements, assesses customer concentration and analyzes revenue recognition practices. The report provides a clearer picture of the cash flow you can expect after buying the business. SBA lenders often require or strongly recommend QoE reports for acquisitions with significant goodwill or complex financials because they improve underwriting confidence.

Cost Factors

The cost of a Quality of Earnings (QoE) report depends on several variables, including the size and complexity of the business, the scope of the review, and the quality of financial records provided by the seller. A larger company with multiple revenue streams or less organized books will typically require more time and analysis, increasing the fee.

Engaging a firm early—ideally right after signing the LOI—can help manage timelines and ensure a thorough review. While PCA does not provide QoE services, we can help you plan for this step and explore ways to fund the cost through SBA loan proceeds when eligible.

Why the Investment Pays Off

While a QoE report may seem expensive, it offers substantial benefits:

• Avoid overpaying. Adjusting earnings for anomalies often reveals that reported profits are inflated. This can justify a lower purchase price or prompt you to walk away from a bad deal.
  
• Improve financing odds. SBA lenders value QoE reports because they confirm sustainable cash flow. A strong report can speed up underwriting and may lead to more favorable terms.
  
• Identify working capital needs. QoE analyses evaluate working capital levels to ensure the business can operate smoothly post‑closing. Underestimating working capital can force you to inject additional capital or draw on lines of credit.
  
• Enhance negotiation. Armed with detailed findings, you can negotiate earn‑outs, escrow holdbacks or price adjustments to mitigate risks discovered in the report.
  
• Plan integration. Understanding customer mix, margin drivers and cost structures helps you plan how to integrate and improve the business after acquisition.
  

Funding QoE Costs with SBA Loans

SBA 7(a) loans allow buyers to finance certain transaction costs as part of the total project cost. Many lenders will finance the cost of a QoE report, along with legal fees, appraisals and the SBA guaranty fee. Including these fees in your loan preserves your cash. Make sure your lender is aware of your intention to include the QoE cost so they can add it to your sources and uses statement.

Choosing a QoE Provider

Select a firm with experience in your industry and in SBA‑backed transactions. Verify their credentials—look for Certified Public Accountants (CPAs) or Certified Valuation Analysts (CVAs). Request a sample report to understand their approach and ensure it aligns with your needs. Ask for references from past clients who acquired businesses of similar size and complexity.

Partner With Pioneer Capital Advisory

At Pioneer Capital Advisory, we help buyers integrate quality of earnings reports into their acquisition strategy. We can recommend reputable QoE providers, coordinate with lenders to finance the report and interpret findings to inform negotiations. Our team ensures that QoE insights translate into stronger financing packages and fewer surprises post‑closing.

Ready to Budget for Your QoE Report?

A quality of earnings report is not just a line item—it’s an investment in peace of mind and deal success. If you’re preparing to buy a business and want help budgeting and selecting a QoE provider, contact us. We’ll help you build the cost into your SBA loan, interpret the results and negotiate a deal that reflects the business’s true earnings.