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Glossary

What is Quality-of-Earnings (QoE) Review?

Also called: QoE, QoE report, earnings review

In one sentence: An independent analysis of a business’s earnings that tests whether reported profit is real, repeatable and supported by records.

Last updated · Precise SBA editorial

In plain English

A quality-of-earnings (QoE) review asks a simple question: is the profit this business reports real, and will it repeat? An independent accountant tests the numbers against bank statements, invoices, contracts and tax returns, and reports what the business actually earns once one-time and unsupported items are removed.

What it usually covers

  • Revenue quality: customer concentration, recurring vs one-off, how revenue is recognized.
  • Add-backs: which adjustments are supportable and which are not.
  • Working capital: whether the business has a normal level at closing.
  • Debt-like items that a buyer will effectively inherit.
  • Trend: whether the recent year is representative.

Why lenders and buyers care

It gives the lender an independent view of the cash flow the loan relies on, and gives the buyer protection against overpaying. It can also lower the price, which is useful to know before closing, not after.

Hypothetical example

A seller’s materials show strong profit. The review finds that a large customer pays late, that a one-time sale inflated the last quarter, and that two owner expenses were counted twice as add-backs. The supportable cash flow is lower. The buyer renegotiates the price; the lender sizes the loan on the reviewed number.

Common mix-ups

  • It is not a valuation. It supports the earnings figure a valuation or price would rely on.
  • It is not only for big deals. Smaller ones can benefit too, especially when records are messy.

What to do with it

Ask the lender early whether one is expected, and clean up the books first. See financing a business acquisition.

Common questions

Is a QoE review required for every acquisition?

No. SBA rules require one when the business purchase price, not counting real estate, is $3 million or more and the buyer is a new owner or an expanding business; lenders may also ask for one on smaller deals if numbers do not tie. Confirm with your lender.

Who performs it?

Typically an independent accounting firm with transaction experience, engaged for the purpose. Lenders may care who it is, so ask first.

How is it different from an audit?

An audit checks that financial statements follow accounting rules. A QoE tries to find the true, repeatable earning power of the business for a buyer, including adjustments an audit would not make.

Related terms

Add-BacksExpenses added back to reported earnings because they are non-cash, will not continue after a deal, or are personal to the current owner.Change of OwnershipThe SBA term for a business purchase, including a partner buyout, which carries its own requirements on buyer cash, seller notes and cash-flow coverage.Debt Service Coverage Ratio (DSCR)Cash available to pay debts, divided by the debt payments due in the same period; above 1.0x there is a cushion, and lenders want margin above their own minimum.

Go deeper

Buying a Business with an SBA Loan: How the Financing Comes TogetherAn acquisition loan is underwritten on the business you're buying, and on you. Here's how the pieces fit, in the order they usually come up.How Lenders Calculate Cash Flow and DSCR, Step by StepFrom net income to a coverage ratio in five steps, with every number shown. This is the math behind most acquisition and expansion loan decisions.

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General information, not legal, tax or financial advice. Precise SBA is not affiliated with the U.S. Small Business Administration. Rules and lender policies change. Examples use hypothetical numbers. We never charge you. If a loan closes, the lender may pay us a referral fee, disclosed on SBA Form 159 (how we get paid). Back to the glossary.