Quality of earnings reports: when you need one

By the time you're serious about a company, you've read its tax returns, compared them with the books and maybe matched the revenue to the bank deposits. You have a number for owner earnings (profit plus what the owner pays themselves, before loan payments and taxes), and the price is built on it.

The question that remains is simple to ask and hard to answer: is that number real, and will it last? A quality of earnings report is an independent accountant's answer.

What a quality of earnings report is

It's a review, done by an outside accounting firm, of the earnings a buyer and lender are relying on. The firm digs into the records, tests the seller's adjustments and produces its own figure for what the company earns on a normal, repeatable basis.

It helps to know what it isn't:

• It isn't an audit. An audit checks whether financial statements follow accounting standards and ends in a formal opinion. A quality of earnings review asks a more practical question: what does this business really earn?
• It isn't a valuation. It doesn't tell you what to pay. It tells you how much confidence to have in the earnings you're paying for.
• It isn't a guarantee. It works from records and interviews, and it can only be as good as what it's given.

What it usually covers

The scope varies by firm and by deal, but a typical review looks at:

• Whether the books tie to everything else: the tax returns, the bank statements and the internal reports. That usually includes a full proof of cash, the check described in our post on checking revenue against bank deposits.
• Every add-back. Is the owner's pay really what the seller says? Was the "one-time" cost really one time? Is that personal expense documented?
• Revenue quality. How much comes from the biggest customers, how much repeats, which customers left, and whether the trend by month holds up.
• Costs and margins. Whether rent, wages and supplier prices will stay the same after a sale. Below-market rent paid to an owner who owns the building, or a family member working for free, will cost you more later.
• Accounting method. Whether income and costs land in the right months, especially in a company that keeps its books on a cash basis.
• Working capital. The normal level of receivables, inventory and bills owed, which feeds directly into how much should stay in the business at closing. Our post on working capital at closing explains why that matters.
• Items that act like debt, such as customer deposits for work not yet done, unpaid taxes or repairs that have been put off.

The result is a bridge from the profit the seller reported to the earnings the reviewer thinks you can rely on, with every step explained.

A hypothetical example

Say you're looking at a hypothetical IT services company priced at about 3 times a year's owner earnings. Here's how a review might change the picture:

Item	Amount
Owner earnings, as the seller presented them	$620,000
Less profit from a large contract that ended in the spring	($70,000)
Less revenue booked in December for work done in January	($25,000)
Less a bookkeeper to replace the owner's spouse, who did the books unpaid	($45,000)
Owner earnings after the review	$480,000

At 3 times earnings, that's the difference between a price of about $1.86 million and about $1.44 million. None of the three findings means the seller was dishonest. Each is the kind of thing that's easy to miss from the inside.

Who does it, and what it costs

Quality of earnings reviews are done by accounting and advisory firms that work on business purchases. Some focus on smaller deals. The firm should be independent of the seller and of the seller's accountant.

Cost depends on the size of the company, how clean its records are, how much the firm is asked to cover and how fast you need it. A narrow review of a small company with tidy books costs far less than a full review of a larger, messier one. Ask two or three firms for a written scope and a fixed fee, and get those quotes before you sign a letter of intent, so the cost is in your budget from the start.

Expect to pay for it yourself, and if your lender orders one, ask how the cost is handled. The work happens during due diligence, after the seller has agreed to your main terms and opened the books fully, and it can take several weeks. Build that time into your schedule.

When an SBA lender requires one

For SBA loans, since October 1, 2026, the agency's lending manual requires the lender to get a quality of earnings report when the purchase price is $3 million or more. Real estate the business occupies and is buying isn't counted toward that price. The line is measured before your down payment or any seller financing, so structuring the deal differently doesn't get you under it.

The same manual sets some rules for the report itself:

• It must be done by an independent, experienced financial professional for the lender's benefit, and it can't be prepared by or for the seller.
• It must include a cash proof covering the last 12 months and the last two full years.
• It must identify and document every add-back and adjustment.
• The lender must use the report's earnings when checking that the company can carry the loan. If those earnings don't support the deal, the loan gets smaller.

If you commission your own report first, the lender may have one of its approved firms review it rather than starting over. The SBA revises these rules from time to time, so ask your lender which version applies to your loan.

When it's worth it on a smaller deal

Below that line, it's your call. A review is often worth the cost when:

• The price is large compared with your savings. If most of what you own is going into the deal, a few weeks of expert checking is cheap insurance.
• Add-backs make up a big part of owner earnings. The more the seller's figure depends on adjustments, the more each one needs testing.
• The books are messy, or the profit and loss statement and the tax returns don't agree easily.
• The company handles a lot of cash.
• A few customers bring in much of the revenue.
• Earnings jumped recently, and you're being asked to pay for the jump.
• You're new to the industry and don't yet know what normal looks like.

For a very small company with simple, clean books that already tie to the tax returns and the bank, a narrower review may do. Some firms will quote a limited scope, such as a proof of cash and a test of the add-backs, for less than a full report.

Using what it finds

Share the findings with your lender. If the earnings come in lower than the seller's figure, bring the report to the seller calmly, with the documents behind each change. A lower figure doesn't always mean a lower price: sometimes the answer is a change in structure instead, as our post on price versus terms explains.

Keep the report after closing, too. The issues it raises make a good list of things to fix in your first months as owner.

What to do this week

• Ask your lender whether your deal would need a quality of earnings report, and whether it would review one you order.
• Ask two or three accounting firms for a written scope and a fixed-fee quote.
• Gather what they'll ask for first: three years of tax returns, monthly financial statements and bank statements for every account.