What it is
A quality of earnings (QoE) report is an independent accountant's review of the seller's claimed "add-backs" (the personal car, the one-time legal bill, the family member on payroll) that get added back to reported profit to arrive at the adjusted earnings number a buyer pays a multiple on. Instead of taking the seller's or broker's list at face value, a QoE traces each add-back to source documents: bank statements, invoices, contracts, and payroll records.
For deals in the price range most SBA buyers are looking at, a QoE typically runs a small fraction of the deal size and is usually ordered once you're under LOI (a signed letter of intent), not before. It's a validation step, not a shopping tool.
Why it matters
Every dollar of add-back inflates the purchase price, because small businesses are typically priced as a multiple of earnings: price equals earnings times an agreed multiple. An unsupported $50,000 add-back at a 3x multiple isn't a rounding error. It's $150,000 you paid for earnings the business never actually generated.
Add-backs are also where sellers most often round generously in their own favor without intending outright fraud. A spouse listed as an "office manager" earning above-market pay for genuinely part-time work is a real add-back, but only for the gap between what's paid and what the role actually costs at market rate, not the whole salary.
What to look for
- Add-backs with no receipts, invoices, or other documentation behind them
- Personal vehicle, travel, or entertainment expenses added back in full when part of the spending was plausibly business-related
- Family salaries added back entirely when the role still needs to be filled by someone, at some real cost
- Recurring costs (insurance, software, subscriptions) mislabeled as "one-time"
- Whether an independent QoE firm has actually reviewed the number, versus only the seller's own broker
Keep going
- Related guides
- See it in a deal
- Where this fits
- Terms in this guide
- QoE
This guide is for informational and educational purposes only. It does not constitute legal, tax, financial, investment, or lending advice, and is not a substitute for advice from a qualified attorney, accountant, lender, or other licensed professional.