Most buyers treat the quality of earnings report as a checkbox. Something the lender wants, so you get it done and move on.
That is backwards. A well-executed QoE is one of the sharpest negotiating tools you have. It can move the price down by six figures, restructure the deal terms entirely, or kill a deal before you sink six months into it. And yet, the majority of first-time buyers barely read the thing before signing off on diligence.
Here is how to actually use it.
What a Quality of Earnings Report Shows
A quality of earnings report is an independent financial analysis of a target business, typically performed by a third-party CPA firm. It goes well beyond what the seller’s tax returns or P&L statements show.
The QoE zeroes in on one question: how much of this business’s reported earnings is real, recurring, and defensible?
It examines add-backs, one-time expenses, owner compensation adjustments, revenue timing, customer concentration, working capital trends, and anything else that affects the true cash flow of the business. On an SBA deal, that means the number that gets run through the debt service coverage ratio model. Not the seller’s version of SDE (which, in our experience, is almost always higher than reality). The real, adjusted figure.
If the seller is showing $600K in seller discretionary earnings and the QoE comes back at $480K, you now have a different deal than the one you signed an LOI on.
When to Order the QoE
Order it after your LOI is executed and you have an exclusivity period in place. Not before. You are paying a few thousand dollars for this analysis, and you want the seller locked out from shopping the deal to other buyers while you do it.
Typical QoE cost runs $4,000 to $12,000 depending on complexity and the firm you use. For an SBA deal in the $500K to $5M range, it is almost always worth it. Think of it this way: a $6,000 QoE that moves the price down $200K is the best return on investment you will ever see in a deal process.
But here is where timing matters more than people realize. Do not wait until the end of diligence to review the findings. As soon as the QoE firm flags something material, you address it. The longer you wait to raise a pricing issue with the seller, the harder that conversation gets. Sellers who have been mentally spending their proceeds for three extra weeks are much less receptive to a price adjustment than sellers who hear about findings early and have time to process them.
How QoE Findings Become Your Strongest Negotiating Tool
This is where most buyers leave money on the table.
The QoE will almost always surface something. Maybe the seller has been adding back $80K in “one-time” legal fees for the third year running. Maybe a major customer just renewed on a shorter contract and accounts for 35% of revenue. Maybe the reported SDE includes $45K in depreciation add-backs that a new buyer cannot replicate.
Each of these findings is a price adjustment conversation waiting to happen.
Here is how to structure it. Take the adjusted SDE from the QoE. Multiply it by the agreed-upon multiple from your LOI (or negotiate a new one if the earnings base has changed materially). That gives you your revised offer.
Say you are buying an accounting firm listed at $1.8M based on $500K in SDE at a 3.6x multiple. The QoE comes back showing true recurring SDE closer to $400K after removing unsupportable add-backs and adjusting for a key employee risk the seller buried in the notes. At the same 3.6x multiple, you are now looking at a $1.44M deal. That is a $360K price reduction driven entirely by documented findings, not negotiating posture.
Let the numbers do the talking.
Structuring the Conversation with the Seller
Do not send a “we’re reducing our offer” email and hope for the best. That is how deals fall apart.
Frame every QoE-driven price adjustment as a finding, not an accusation. You are not saying the seller lied. You are saying the independent analysis surfaced information that changes the economics, and you need the price to reflect that. There is a real difference between those two framings, and sellers feel it immediately.
Walk through the findings line by line. Give the seller and their broker a chance to respond. Some add-backs will be legitimate and you will accept the seller’s explanation. Others will not hold up. That is where you hold the line.
The seller who gets defensive and refuses to engage with QoE findings is telling you something important. A reasonable seller understands that an independent review is part of the process. If they are fighting every single finding, that is a due diligence red flag in its own right. We have seen this pattern enough times to know: the ones who push back hardest on the QoE usually have the most to hide.
What the SBA Lender Does with the QoE
This matters because the lender has a vote too.
SBA lenders run their own underwriting, but they will review your QoE. If the QoE shows adjusted SDE materially lower than what was used to support the purchase price, the lender will use the lower number. They have to. It is how they protect the loan.
We target a 2x debt service coverage ratio on deals we work on, with a floor of 1.5x when synergies can be clearly documented. If the QoE-adjusted SDE kills the DSCR, the deal does not get to the closing table regardless of what you and the seller agree on. The math is the math.
And this is also why working capital needs to be part of the conversation at this stage. The QoE often reveals that the working capital the business needs to operate is higher than what the seller represented, or that the seller has been running the business lean in ways that would not survive the transition. That affects your total capital requirement at close, which is separate from the purchase price but absolutely affects whether the deal pencils.
So the QoE protects you twice. First as a negotiating tool to get the price right. Second as a structural check that the deal can actually get financed at the agreed terms.
If the lender’s underwriting comes back with a lower supportable loan amount based on the QoE findings, use that in your price renegotiation. “The lender will only go to $1.3M on this deal” is a hard number. It closes the conversation fast.
Common QoE Findings and How to Handle Them
Most findings fall into a handful of categories. Knowing them in advance means you know exactly what to push on.
Unsupportable add-backs. The seller adds back personal expenses that a new owner would not incur the same way, or labels recurring costs as one-time. Push back hard on anything labeled “one-time” that appears in more than one year of financials. Three years of “one-time” legal fees is not one-time. It is a cost of doing business.
Owner compensation adjustments. Sellers often normalize their own salary to market rate to inflate SDE. Make sure the replacement manager cost is realistic for your market. In a mid-size market, a qualified general manager for a $3M revenue business is $90K to $120K. Not $60K. If the QoE firm uses a lowball replacement salary, question it. This number matters more than most buyers appreciate because it directly determines how much of the cash flow is actually available for debt service and your return.
Revenue timing and accruals. Watch for revenue pulled forward into the trailing twelve months that belongs to the next period. This inflates current-period SDE and will not repeat.
Customer concentration. Not a direct add-back issue, but a QoE-driven risk that justifies either a price reduction or an earnout structure where a portion of the price is tied to key customer retention. If one customer is 35% of revenue, that is not a stable earnings base. Price accordingly.
Related-party transactions. Seller paying rent to an entity they own, paying family members salaries, or buying from a supplier they have an undisclosed interest in. All of this affects the true cost structure of the business. Side note: related-party rent is one of the most common QoE findings we see, and it is also one of the easiest for the seller to rationalize away. Get a market-rate comp. Do not accept “that’s just what we charge.”
For any of these, the response is the same. Document it, quantify the dollar impact, and bring it to the price conversation with the specific number attached.
Using QoE to Negotiate Price Without Losing the Deal
The goal is not to use the QoE as a weapon to hammer the seller into the ground. The goal is to pay the right price for what the business actually earns.
Most sellers have a number in their head and have been living with it for months or years. Arriving with a list of QoE findings and demanding a 20% reduction in the same conversation is a fast way to lose the deal entirely.
Sequence it. Let the QoE firm deliver the report. Review it with your advisor. Identify the findings that are material and defensible. Prioritize the ones with the biggest dollar impact. Then request a call with the seller and their broker to walk through findings together before you put a revised number on paper.
This gives the seller time to process.
It also signals that you are a serious, prepared buyer. That positioning matters. Sellers and brokers have options, and they move toward buyers who feel like they will actually close. From what we have seen across hundreds of deals, the buyers who walk sellers through findings methodically, rather than dropping a revised number out of nowhere, end up with better outcomes on both price and terms.
When you do present the revised number, anchor it to the QoE findings explicitly. “Based on the adjusted SDE from the independent analysis, which came in at $430K versus the $510K used to set the original purchase price, we are revising our offer to $1.55M.” That is a number with a reason. It is harder to reject than a number that appears to come from nowhere.
And remember: structure matters more than price. If the seller will not budge on the headline number, you can often accomplish the same economic result through a seller note on full standby at 0% interest, an earnout tied to the QoE-identified risk factors, or an adjustment to the working capital peg at close. We achieve full standby seller note terms on more than 90% of our deals. Meet on price, win on terms.
Frequently Asked Questions
What is a quality of earnings report and why does it matter for price?
A quality of earnings report is an independent financial analysis that examines whether a business’s reported earnings are accurate, recurring, and sustainable. It matters for price because SBA lenders and buyers base the purchase price on a multiple of the business’s true cash flow. If the QoE shows the real earnings are lower than what the seller reported, the supportable price drops with it.
How much does a QoE typically cost on an SBA deal?
Most QoE engagements for businesses in the $500K to $5M range cost between $4,000 and $12,000. Complexity drives cost. A simple service business with clean books and one revenue stream sits at the low end. A business with multiple entities, related-party transactions, or complex revenue recognition sits higher, sometimes at the top of that range or beyond.
Can I negotiate price after the LOI is signed using QoE findings?
Yes. This is exactly what the QoE is for. The LOI establishes the initial purchase price based on represented financials. The QoE is conducted during diligence, and material findings that affect the earnings basis are standard grounds for a price renegotiation. Most experienced sellers and brokers expect it.
How does the SBA lender use the QoE in underwriting?
The lender reviews the QoE as part of their underwriting process. If the QoE-adjusted SDE is lower than the number used to support the purchase price, the lender will underwrite to the lower figure. This directly affects the supportable loan amount and can cause the lender to require a lower purchase price before proceeding.
What QoE findings give the most negotiating power?
Unsupportable add-backs and inflated owner compensation adjustments carry the most weight because they directly reduce the recurring SDE used to value the business. Revenue timing issues and customer concentration findings are also strong, particularly when they affect near-term cash flow or increase deal risk enough to justify a price discount or earnout structure.
Want Help Running the Numbers on Your Deal?
Regalis Capital works with buyers through the full acquisition process, from sourcing through close. We review 120 to 150 deals per week, run detailed underwriting models before any LOI goes out, and manage the QoE and SBA process so nothing gets missed.
If you are in diligence on a deal and want a team that knows how to use QoE findings to negotiate the right price, start here.