The short answer: A Quality of Earnings report is a paid, independent verification of a business's true, sustainable earnings, it rebuilds the numbers from source data and tests every add-back. It typically costs $5,000 on a small limited-scope review up to $50,000+ on larger deals (small-business buyers often see $10k, $15k). Under $1M SDE you frequently don't need a full QoE, the SBA doesn't require one and a CPA reconciliation may be enough, unless the books are messy, add-backs are large, or there's related-party or concentration risk. It's diligence, not an audit or a valuation.
What a QoE actually is
A Quality of Earnings analysis is performed by an accounting or transaction-advisory firm on the buyer's behalf. Instead of taking the seller's P&L at face value, the QoE team rebuilds it: they trace revenue to source, scrutinize each add-back, normalize owner compensation and one-time items, and land on a defensible adjusted EBITDA or SDE, the number you should actually be paying a multiple on.
The word that matters is quality. Two businesses can report the same profit, but one earns it from sticky, recurring customers and clean books, and the other from a single client and a pile of aggressive add-backs. The QoE tells those apart.
An audit asks "are these numbers correct?" A QoE asks "are these earnings real, and will they still be here after I own it?"
What a QoE covers
- Revenue quality, recognition, timing, recurring vs one-time, and concentration.
- Normalized earnings, every add-back tested; owner perks and one-offs removed or added back correctly.
- Margin trends, is profitability stable, improving, or quietly eroding?
- Working capital, the normal level the business needs to run, which feeds the working-capital peg.
- Proof of cash, deposits reconciled to reported revenue.
- Risk flags, customer concentration, related-party deals, and other red flags.
What a QoE is not
It's not an audit (no formal opinion on GAAP compliance), not a business valuation (it verifies earnings; you still apply the multiple), and not legal diligence. It's the financial engine of your broader due diligence.
What a QoE costs
A QoE is a real, paid engagement, and the price scales with deal size, how clean the books are, and how much scope you buy.
| Scope | Typical cost | Best for |
|---|---|---|
| Limited / focused review | ~$5,000, $15,000 | Small, clean deals; a targeted second set of eyes |
| Full QoE with written report | ~$20,000, $40,000 | Larger deals, messy books, or significant add-backs |
| Complex / larger deal | $50,000+ | Multi-entity, high EBITDA, or contested numbers |
Turnaround is usually 2 to 4 weeks. On the smallest deals, a QoE can cost a meaningful fraction of the business itself, which is exactly why they're less common on Main Street acquisitions.
Do you need one under $1M SDE?
This is the real question for most buyers here, so let's answer it directly: often, no, not a full one. Three facts drive that:
- The SBA does not require a QoE. Lenders underwrite small acquisitions primarily from tax returns and the add-back schedule.
- SDE, not EBITDA, is the operative metric at this size, and SDE is more straightforward to verify from returns.
- For a genuinely clean small business, a CPA reconciling returns to the presented financials and reviewing add-backs can be adequate diligence.
But "often no" isn't "never." Buy the QoE, or at least a limited-scope one, when any of these are true:
| Lean toward skipping a full QoE | Lean toward getting one |
|---|---|
| Clean books; returns tie to financials | Messy books or restated numbers |
| Small, defensible add-backs | Large or questionable add-backs |
| Diversified customer base | Customer concentration / related-party revenue |
| You have CPA support already | You're financing near the top of your capacity |
| Simple single entity | Multiple entities or commingled owner finances |
The middle path
You don't have to choose between "$40k full QoE" and "nothing." A limited-scope QoE or a focused CPA add-back review gets you most of the protection on a small, clean deal for a fraction of the cost. Match the spend to the risk.
Is it worth it?
Frame it as insurance. If a $12,000 review keeps you from overpaying by $80,000, or from buying earnings that evaporate when the owner leaves, it paid for itself many times over. The larger the deal and the messier the books, the more obviously the math favors the QoE. On a small, clean business you've already verified against tax returns, the same $12,000 may be better spent elsewhere. Run the deal both ways in the valuation calculator before you decide.
QoE fits inside your broader diligence
Use the full checklist to know exactly where financial verification ends and legal/operational diligence begins.
Frequently asked questions
An independent, paid financial analysis, usually by an accounting or transaction-advisory firm, that verifies a target's true, sustainable earnings. It rebuilds the numbers from source data, tests each add-back, normalizes one-time and owner items, and flags risks. It's diligence, not an audit or a valuation.
Typically ~$5,000 for a limited-scope review up to $50,000+ on larger or complex deals. Small-business buyers often see $10k, $15k for a focused report; a full QoE with a written opinion commonly runs $20k, $40k. Price scales with deal size, book quality, and scope.
Often not a full one. The SBA doesn't require it, and lenders underwrite from tax returns and add-back schedules with SDE as the key metric, so for a clean small business a CPA reconciliation can be adequate. Get one when there are large or questionable add-backs, messy books, related-party deals, or customer concentration.
No. An audit opines on whether historical statements comply with accounting standards. A QoE is buyer diligence focused on normalized, sustainable earnings, cash-flow durability, working capital, and deal risk, not a formal audit opinion.
Sources
- QoE scope, cost ranges, and the under-$1M decision, ProjectionHub, Stacking Capital (2026).
- Why QoE is less common on small deals; SBA underwriting from returns, Commercial Capital LLC, EBIT Community.
