Checking the money, and why a quality of earnings report is worth it

The short version

• Due diligence is your full check of the business after the letter of intent. Start with the money.
• Tie the seller's numbers to tax returns and bank statements, month by month.
• A quality of earnings report is an outside accountant's detailed check of what the business really earns.
• At $3 million or more, an SBA lender must have one. If you commission your own, the lender can have one of its vendors review it instead of ordering a second.
• Below that size, it is optional. Many buyers find independent eyes on the numbers worth the cost.

Start with the money

Your CPA will:

• Tie revenue to bank deposits, month by month.
• Tie the financial statements to the tax returns.
• Test each add-back with records. Lesson 5.3 covers add-backs.
• Look for one-time events that make a year look better or worse than normal.
• Check working capital and its seasonal swings. Lesson 6.5 covers this.
• Look at trends by month and by customer.

What a quality of earnings report adds

A quality of earnings report, or QoE, is a structured version of that work by an accounting firm that does it regularly. It answers one question: are the earnings you are paying for real, and will they continue?

The value is independence. The seller's numbers were prepared to sell the business. Your own math may lean toward the deal you want. A QoE gives you a view from someone with no stake in either.

When it is required

For SBA-financed purchases of $3 million or more, rules effective October 1, 2026 require a quality of earnings report ordered by the lender. A report prepared for the seller cannot be used. If you commissioned your own, the lender can have it reviewed by one of its approved vendors rather than starting over, which can save you paying twice. What you pay for due diligence reports counts toward your required cash.

Below $3 million, or without an SBA loan, it is your choice.

When it is worth it

• The earnings rely on many add-backs.
• The books are informal or cash-based.
• Revenue jumped recently.
• The price stretches your ceiling.
• You are new to the industry.

What it costs

QoE reports cost money, and the cost depends on the size and complexity of the business. Ask for quotes. Compare that cost with the price of overpaying.