You found a business you like. The broker sent over a CIM with $600K in seller discretionary earnings, and the seller says the number is clean.

That number is almost never what it appears to be. Not because sellers are lying. Because SDE figures in a broker CIM are built to look as good as possible, and there is a difference between “defensible on paper” and “what you will actually earn as the new owner.” A buy side quality of earnings report is how you close that gap before you wire money.

Here is what the process looks like, why it matters for SBA underwriting, and what to do when the findings come back ugly.

What a Buy Side Quality of Earnings Report Actually Does

A quality of earnings report (most people just call it a QoE) is a financial due diligence document prepared by an independent CPA or transaction advisory firm. You commission it. You pay for it. It works entirely in your interest.

The QoE goes line by line through the income statement. It identifies which revenue is recurring versus one-time, and it scrutinizes every add-back the seller is claiming. It flags working capital swings, unusual expense timing, and any accounting treatment that flatters the earnings number.

What you get at the end is an adjusted EBITDA or SDE figure that reflects what a new owner would actually earn after the deal closes. That number is often materially different from what the broker put in the CIM.

Why the Seller’s Number Is a Starting Point, Not a Final Answer

Sellers and their brokers add back expenses to build the highest defensible earnings figure. Some of those add-backs are completely legitimate. Some are aggressive. Some are flat-out wrong.

Common add-backs you will see:

  • Owner salary above market rate (legitimate, but often inflated)
  • Personal expenses run through the business (legitimate if documented)
  • One-time legal or accounting costs (legitimate once)
  • Depreciation and amortization (standard)
  • Family member salaries for minimal or no work (sometimes defensible, sometimes fiction)
  • Revenue from a customer that has since churned (not legitimate under any framework)

A broker has no obligation to tell you which category each add-back falls into. Their job is to sell the business. Your job is to verify every line.

A buy side quality of earnings report separates the defensible from the aggressive, and the recurring from the one-time. We routinely see adjusted SDE come in 10% to 30% lower than the broker’s stated number after a thorough QoE.

On a $2M acquisition at a 3x multiple, that difference could wipe out $200K to $600K in deal value. Not a hypothetical. A real number with real consequences for your loan structure and your first year of ownership.

How Buy Side QoE Findings Affect SBA Underwriting

This is where the buy side quality of earnings becomes more than a nice-to-have.

SBA lenders underwrite to a minimum 1.25x debt service coverage ratio. That is the SBA’s threshold, not ours. We target 2x DSCR, with 1.5x as the floor when there are clear, documentable synergies present. Anything below 1.5x and you are operating with almost no margin for error.

Here is the math on a real scenario. Say you are buying a $1.5M business at 3x a stated $500K SDE. Your SBA loan is $1.35M at current rates on a 10-year term. Rough annual debt service is around $175K. With $500K SDE, DSCR is 2.85x. Comfortable.

Now the QoE comes back and adjusted SDE is $380K. DSCR drops to 2.17x. Still workable, but you are now paying 3x for a business that was only worth 3x at $500K. At $380K, the price needs to come down.

This is exactly the leverage a QoE gives you in negotiation. You are not arguing with the seller based on instinct. You are presenting a documented, third-party financial analysis that shows what the business actually earns.

Price reductions after QoE findings are standard. They happen in the majority of deals.

When to Order a Buy Side Quality of Earnings

Timing matters more than most buyers realize. Order it too early and you waste money on a deal that falls apart for other reasons. Order it too late and you have burned through LOI exclusivity without critical information.

After the LOI is signed. You have exclusivity. You are in diligence. This is when the QoE kicks off.

Before you commit to final deal terms. QoE findings should inform your final purchase price. If findings come after you have shaken hands on a number, you have lost most of your negotiating position.

After you have preliminary lender feedback. Your SBA lender should have reviewed the deal at a high level before you spend $5K to $15K on a QoE. If the lender has obvious structural concerns, get those resolved first.

For deals under $500K in acquisition price, a full QoE may not be cost-justified. A focused financial due diligence review covering the key add-backs and revenue quality can accomplish most of what you need at lower cost. For anything above $750K, a QoE is almost always worth it.

What the QoE Process Looks Like in Practice

A buy side QoE typically takes 2 to 4 weeks. Here is how it unfolds.

1. Engage the CPA firm. You hire an independent firm, not affiliated with the seller or their accountant. Cost typically runs $5,000 to $15,000 depending on deal size and complexity.

2. Data room setup. The seller provides 3 years of tax returns, profit and loss statements, bank statements, and accounts receivable and payable aging reports. Sellers who drag their feet on providing documents are a signal worth paying attention to.

3. Management interview. The QoE team talks to the owner. They ask about revenue concentration, customer contracts, employee dependencies, and the basis for each add-back.

4. Financial statement analysis. The CPA goes through every line item. Revenue by customer, by month, by channel. Expense categorization. Working capital trends. One-time items versus recurring costs.

5. Adjusted earnings calculation. The firm produces a normalized EBITDA or SDE figure with each adjustment documented and explained.

6. Report delivery. You get a written report with findings, adjustments, and quality observations. This document becomes your negotiating instrument for the rest of the deal.

Your advisor or attorney should be involved throughout. The QoE findings need to feed directly into LOI amendments, purchase price adjustments, or escrow holdback structures.

So that covers the analytical side. The question is what you actually do with the findings.

Using QoE Findings to Renegotiate

When the QoE comes back lower than the stated earnings, you have three paths forward.

Renegotiate the price. Present the findings, show the adjusted SDE, and argue for a lower multiple or a flat dollar reduction. Most sellers will negotiate when the report is credible and the adjustments are documented. This is the most common outcome.

Restructure the deal. If the seller will not move on price, structure becomes your lever. You can add an earnout tied to performance, increase the seller note (on full standby at 0% interest, which we achieve on roughly 90% of our deals), or add a working capital adjustment mechanism that protects you if the business delivers less than projected. Each of these shifts risk back to the seller, which is where it belongs when the numbers do not support the asking price.

Walk away. Not every deal survives a QoE. If adjusted earnings drop the DSCR below 1.5x and the seller will not move on price or structure, the deal does not work. Walking is not failure. It is the QoE doing its job.

We have seen buyers try to push through deals that a QoE clearly broke. It almost never ends well. The numbers do not lie. Believe the report.

Working Capital: The Part Most Buyers Forget

A QoE will surface working capital trends, but it is on you (and your advisor) to make sure those findings translate into your deal structure. Working capital is not a nice-to-have line item. It is the cash the business needs to operate from day one.

We require 2 to 6 months of working capital as part of deal planning. That range depends on the business model, seasonality, and how quickly receivables convert to cash. If the QoE reveals that the seller has been running the business on fumes with minimal cash reserves, that is a deal structure problem, not just a financial footnote.

Build working capital into your SBA loan request or your equity injection plan. If you close without adequate working capital, you are underfunded on day one, and no amount of solid earnings will save you from a cash crunch in month three.

What a Good Buy Side QoE Firm Looks Like

Not all QoE providers are equal. A firm that primarily does audit and tax work will approach this very differently than one that specializes in transaction advisory.

For lower-middle market deals in the $500K to $5M range, look for CPA firms with dedicated transaction services or M&A advisory practices. You want experience with deals in your target size range and industry. Familiarity with SBA lending requirements matters more than it sounds (the SBA has specific documentation and underwriting standards that a generalist firm may not understand). And you want a firm willing to produce a written report, not just a verbal debrief.

Your M&A advisor should have a roster of QoE firms they work with regularly. If you are working with buy side M&A advisors, they should be able to recommend providers with relevant deal experience in your target sector.

Ask for a sample report before you engage. The structure and depth of a QoE varies widely. You want to see line-item analysis, not a high-level summary.

Frequently Asked Questions

What is a buy side quality of earnings report?

A buy side quality of earnings report is a financial due diligence analysis commissioned by the acquirer. It reviews the target company’s historical financials to verify earnings quality, validate or adjust the seller’s add-backs, and produce a normalized earnings figure. It is typically prepared by an independent CPA or transaction advisory firm and supports both purchase price confirmation and SBA underwriting.

How much does a quality of earnings report cost?

Cost ranges from $5,000 to $15,000 for most lower-middle market deals. Complex businesses, multi-location operations, or deals with significant revenue complexity can run higher. For deals under $500K in acquisition price, a lighter-touch financial review may be more appropriate than a full QoE.

Can you skip the QoE if the seller has audited financials?

Audited financials verify that statements were prepared according to accounting standards. They do not verify that earnings are sustainable or that add-backs are legitimate. A buy side quality of earnings report addresses questions audited financials are not designed to answer. For any deal above $750K, we recommend running both.

How does the QoE affect SBA loan approval?

SBA lenders underwrite to the adjusted earnings figure, not the broker’s stated number. If a QoE reduces SDE significantly, it affects the DSCR calculation and can require a price renegotiation before the lender will approve the loan. Lenders actually prefer to see a completed QoE because it reduces their underwriting risk.

What happens if the seller refuses to provide documents for the QoE?

That is a serious red flag. Sellers who are genuinely selling a clean business have every incentive to cooperate with diligence. Delays, incomplete records, or outright refusals to produce bank statements and tax returns typically mean something in the financials does not hold up. In most cases, you should pause the deal until documents are provided or walk.

Work With a Team That Runs QoEs Every Week

Regalis Capital manages the full acquisition process for our clients, including coordinating and interpreting the buy side quality of earnings. We know which adjustments are defensible, how findings translate into price negotiations, and what lenders need to see before they sign off.

If you are in diligence on a deal or thinking about your next acquisition, start here to learn how we work.