A quality of earnings report is an accounting firm's analysis of whether a company's earnings are real, repeatable and backed by cash. It rebuilds EBITDA from the books, tests each add-back, reconciles reported revenue to bank deposits in a proof of cash, and measures the business's normal net working capital. A sell-side QoE is commissioned by the seller before going to market; a buy-side QoE by the buyer during diligence. Lenders use it to settle the EBITDA a loan is sized on. From 1 October 2026 SBA requires one on acquisitions of $3 million or more excluding real estate.
- Prepared by
- An independent accounting or transaction advisory firm
- Main outputs
- Adjusted EBITDA, proof of cash, normalized net working capital, debt-like items
- What it is not
- An audit, or an opinion that the statements are fairly presented
- Sell-side vs buy-side
- Commissioned by the seller before marketing, or by the buyer in diligence
- SBA from 1 October 2026
- Required on acquisitions of $3 million or more excluding real estate
What the report is for
A private company's reported profit is rarely the figure a business is sold on. The seller adjusts it: the owner's above-market salary is added back, a one-time lawsuit is removed, personal expenses run through the company are stripped out. The result, adjusted EBITDA, is multiplied into a price, and the buyer borrows against it. A quality of earnings report tests whether that adjusted figure holds up.
It is not an audit. An audit gives an opinion on whether the financial statements are fairly presented under accounting standards. A QoE gives no opinion. It asks a narrower, more commercial question: are these earnings a sound basis for a price and a loan? A company can have clean audited statements and still have weak earnings quality, for example if one customer is about to leave or the margin depends on a supplier contract that is expiring. The reverse also happens: a company with no audit can pass a QoE comfortably. See quality of earnings vs audit.
Whether a lender requires one is a separate question, covered in do lenders require a QoE to finance an acquisition. This page is about what is inside the report and how to read it.
What a QoE tests
| Section of the report | What it tests | What a lender takes from it |
|---|---|---|
| EBITDA bridge | Reported earnings, the seller's adjustments, then the accountant's own diligence adjustments | The earnings figure the loan is sized on |
| Add-backs | Owner pay against market, one-time items, personal expenses, related-party rent | Which add-backs survive; see EBITDA add-backs |
| Revenue quality | Recognition and cut-off, recurring against one-off revenue, customer concentration and churn | How durable the earnings are after closing |
| Proof of cash | Bank deposits against recorded revenue, and payments against recorded expenses, month by month | Whether the revenue in the books actually arrived |
| Net working capital | Monthly balances of receivables, inventory, payables and accruals, normalized | The working capital peg, and how much line the business needs |
| Debt and debt-like items | Deferred revenue, customer deposits, unpaid taxes, accrued bonuses, deferred maintenance | What must be paid off or deducted at closing |
| Books against tax returns | Reconciliation of the financial statements to the returns filed | Whether the figures can be relied on; see when the two do not match |
Some reports also include pro forma or run-rate adjustments, such as a full year's effect of a price increase or a new contract. Lenders read these with caution and often size on the historical figure instead; see pro forma EBITDA.
Reading the EBITDA bridge
The bridge is the page lenders turn to first. It starts from reported EBITDA, lists every adjustment the seller made, and then lists the accountant's own. A simple example, in plain numbers:
| Item | Seller's view | QoE view |
|---|---|---|
| Reported EBITDA | 1,000 | 1,000 |
| Owner's pay above a market salary | +120 | +120 |
| One-time legal settlement | +40 | +40 |
| Personal expenses run through the business | +30 | +15 (only the part supported by records) |
| Year-end invoices for work done after year end | not adjusted | -35 |
| Obsolete inventory never written down | not adjusted | -25 |
| Rent to the owner's building, below market | not adjusted | -20 (brought up to market rent) |
| Adjusted EBITDA | 1,190 | 1,095 |
Two things stand out in a bridge like this. The seller's adjustments were not wrong so much as one-sided: every add-back increased earnings, and nothing that reduced them was found until someone looked. And the difference, 95 on 1,000, is modest in earnings but large in price and debt, because both are multiples of it. A lender sizing on the QoE figure lends less than one sizing on the seller's, which is why the gap is better found by the buyer's accountant before closing than by the lender's credit officer during underwriting.
The lender will not simply adopt the QoE's number either. It applies its own EBITDA definition and may reject adjustments the accountant accepted. But a documented bridge narrows the argument to a few items instead of all of them.
Proof of cash and working capital
The proof of cash is the test that most separates a QoE from a review of the statements. The accountant takes the bank statements for every account, month by month, and reconciles deposits to recorded revenue and withdrawals to recorded expenses. Revenue that was booked but never deposited, deposits that are loans or owner contributions rather than sales, and cash that left the business without an expense recorded all show up here. For businesses with cash sales, many small customers or informal books, it is the single most useful page in the report.
The working capital analysis measures receivables, inventory, payables and accruals at each month-end over the review period and strips out one-offs. The average becomes the natural starting point for the working capital peg, and the month-to-month swing tells a lender how large a revolving line the business needs. A seasonal business whose working capital doubles at its peak needs a very different line from one that is flat all year.
Sell-side and buy-side
| Sell-side QoE | Buy-side QoE | |
|---|---|---|
| Commissioned by | The seller | The buyer |
| When | Before the business is marketed | After the LOI, during diligence |
| Purpose | Find problems early and defend the asking price | Test the price and the seller's figures |
| Whose interests it serves | The seller's, though a reputable firm reports what it finds | The buyer's |
| Use by lenders | A starting point; some lenders accept it, often with a reliance letter or a buy-side check | Commonly what lenders rely on |
A sell-side report shortens the buyer's work and tends to make the seller's figures more credible, because the obvious questions have been asked. It does not remove the buyer's need to check. Many buyers commission a narrower, confirmatory buy-side review that tests the sell-side report's conclusions rather than starting from nothing. Whether a lender can rely on either report depends on the engagement terms: an accounting firm's report is addressed to its client, and a lender that wants to rely on it usually needs the firm's written consent.
When a lender will ask for one
SBA's rule changes on 1 October 2026. Under SOP 50 10 8.1, financial due diligence is required on every change of ownership, and a quality of earnings report on acquisitions of $3 million or more excluding real estate. Below that size the lender still needs financial due diligence, but it need not take the form of a full QoE. Banks and private credit funds set their own policies, and when lenders require a QoE sets out what drives them: deal size, reliance on add-backs, sponsor involvement and the state of the books.
Where a QoE exists, Transparent's financing model is built on its diligence-adjusted EBITDA and the underwriting memo walks through each adjustment, so lenders are not reconciling the seller's figure with the accountant's. Where the QoE comes in below the price's assumptions, the model shows what the lower figure supports before the file goes to any lender. See how Transparent underwrites.
Common questions
- Is a quality of earnings report the same as an audit?
- No. An audit gives an opinion that the financial statements are fairly presented. A QoE gives no opinion; it tests whether the earnings are real and repeatable enough to support a price and a loan.
- Does SBA require a quality of earnings report?
- From 1 October 2026, under SOP 50 10 8.1, SBA requires one on acquisitions of $3 million or more excluding real estate, and financial due diligence on every change of ownership.
- Can a lender rely on the seller's QoE?
- Sometimes. It depends on the lender's policy and on whether the accounting firm will let the lender rely on the report. Many lenders want a buy-side review as well, even a narrower confirmatory one.
- What happens if the QoE finds lower EBITDA than the price assumed?
- The loan the business supports falls with it. Buyers usually renegotiate the price, add seller financing or bring more equity. Going to lenders on the seller's original figure only moves the same finding into underwriting.
- What is a proof of cash?
- A month-by-month reconciliation of bank deposits and withdrawals to the revenue and expenses in the books. It shows whether reported revenue actually arrived in the bank.