A business can show $1 million in adjusted earnings on the P&L. The bigger question is whether a buyer believes that $1 million will still be there after the seller leaves.
That is really what a Quality of Earnings analysis, or QoE, is trying to determine.
A QoE looks behind the financial statements. It examines how the company makes its money, whether the earnings are recurring, whether the add-backs can be supported, and whether anything in the numbers could become a problem once a buyer, lender or accountant starts digging.
For a seller, this matters because buyers are not purchasing last year's tax return. They are buying the future earning power of the business.
What Does Quality of Earnings Really Mean?
The P&L tells us what was reported.
A Quality of Earnings analysis asks how much confidence we should have in those numbers.
It looks at where the revenue came from, whether margins make sense, whether add-backs are supportable, how dependent the business is on certain customers, and whether there are issues that could surface during due diligence.
The goal is not to make earnings higher or lower.
The goal is to determine what can actually be defended.
Why I Look at Several Years, Not Just One
One year can be misleading.
A contractor completes a project in December and gets paid in February. A supplier invoice lands in January. A restoration company has an unusually strong storm year. An owner incurs a one-time legal expense.
Looking at several years can smooth out normal timing differences, but an average does not fix everything.
Adjusted Earnings
| Year | Adjusted Earnings |
|---|---|
| 2023 | $550,000 |
| 2024 | $610,000 |
| 2025 | $675,000 |
| 2026 | $1,050,000 |
The average matters.
But I still want to know why 2026 jumped so much.
Did the company add recurring customers? Did pricing improve? Or did it land one unusually profitable project that may never happen again?
Same earnings number. Different quality.
Add-Backs Are Usually Where the Debate Starts
Most business owners understand add-backs: owner perks, personal vehicles, excess compensation, family members on payroll, and one-time legal or consulting expenses.
Some are legitimate. Some are aggressive.
The real question is whether a buyer or lender will accept them.
Take owner compensation.
Suppose the owner is paid $250,000 per year. If the company still needs a $150,000 general manager after closing, we cannot pretend the full $250,000 disappears.
The real economic adjustment may be closer to $100,000.
A practical point for sellers: A disputed $100,000 add-back at a four-times earnings multiple can turn into a $400,000 purchase-price discussion.
That is why I would rather deal with questionable adjustments before the business goes to market.
Once the LOI is signed, those same questions can become negotiating leverage.
Revenue Quality Matters Just as Much as Expenses
Two companies can each produce $6 million in revenue and $1 million in EBITDA.
One has 250 customers and no customer represents more than 5% of sales.
The other receives 45% of its revenue from one customer.
Same revenue. Same EBITDA. Very different risk.
A buyer is going to want to know how long that customer has been with the company, whether there is a contract, whether the relationship transfers, and how dependent it is on the current owner.
Accounts receivable can tell another part of the story.
If a company has $1 million in A/R and most of it is less than 30 days old, that may be perfectly normal.
If $600,000 has been sitting there for six months, I want to understand why.
The P&L may look the same.
The quality of the revenue does not.
Cash Basis and Accrual Basis Can Tell Different Stories
A business may file its tax return on a cash basis while maintaining internal books on an accrual basis.
That is not automatically a problem.
A Boca Raton contractor may finish a large project in December and collect the money in February. Depending on the accounting method, the revenue, expenses and cash may fall into different periods.
Over several years, some normal timing differences will smooth themselves out.
Large differences still need an explanation.
If the internal P&L shows $6 million in revenue and the tax return shows $4.5 million, somebody is going to ask why.
There may be a perfectly good answer.
We simply need to know what it is.
Why QoE Can Affect the Purchase Price
Suppose a company is marketed using $1.5 million of adjusted EBITDA.
A buyer agrees to a $6 million purchase price at four times EBITDA.
Then financial due diligence supports only $1.1 million.
At the same multiple, the economics now point to approximately $4.4 million.
The multiple did not change.
The earnings did.
That is a $1.6 million difference.
Quality of Earnings Is Not the Same as a Business Valuation
A QoE asks:
What earnings can actually be supported?
A valuation asks:
What are those earnings worth?
You can apply the right multiple to the wrong earnings and still end up with the wrong value.
Selling a Business for $3 Million or More? SBA Changed the Rules.
Under SBA SOP 50 10 8.1, effective October 1, 2026, qualifying SBA 7(a) Initial Acquisition and Business Expansion transactions with a Business Purchase Price of $3 million or more will require the lender to obtain an independent Quality of Earnings analysis in addition to the business valuation.
The important point is that the $3 million threshold is based on the business purchase price, not simply the SBA loan amount.
Buyer equity or seller financing does not bring a $3.2 million business below the threshold.
Separately valued owner-occupied real estate is excluded from the Business Purchase Price calculation for this requirement.
The formal QoE must also be independently obtained for the lender.
The seller's recast or broker valuation does not replace it.
The Cash Proof Is Where Sellers Need to Be Prepared
For qualifying SBA transactions, the QoE must include a Cash Proof covering the trailing 12 months and the last two fiscal years.
That means the QoE professional will be reconciling bank activity against the income statement and tax returns and investigating material differences.
This is where poorly organized financials can slow the transaction down.
What Should a Seller Have Ready?
For a larger transaction, I would expect a seller to be ready with:
- Tax returns
- P&Ls and balance sheets
- Current interim financial statements
- Bank statements
- General ledger detail where needed
- Current A/R and A/P aging
- Payroll and owner-compensation support
- Documentation for material add-backs
- Customer sales detail
- Related-party transaction information
- Explanations for major cash-versus-accrual differences
If gathering those records is difficult before going to market, it will be much harder when a buyer, lender and QoE team are all waiting.
Do I Need a QoE Before Selling My Business?
Usually, no.
Most sellers do not need to commission a formal QoE before going to market.
And where SBA requires one, the lender must obtain its own independent report anyway.
What I do believe in is QoE readiness.
Before taking a larger company to market, I want to know whether we can support the earnings being presented.
- Can we support the add-backs?
- Do the tax returns and internal financials reconcile?
- What does customer concentration look like?
- Are receivables reasonable?
- Can we explain major changes in revenue or margins?
The goal is not to perform the lender's QoE. The goal is to avoid discovering obvious problems after the LOI is signed.
What I Want to Know Before Taking a South Florida Business to Market
I don't expect perfect books.
Very few privately held companies have them.
I do expect the financial story to make sense.
If revenue jumped, I want to know why.
If gross margin changed, I want the reason.
If one customer represents a large percentage of sales, let's understand the relationship.
If there is a six-figure add-back, let's support it.
If the tax return and P&L are materially different, let's understand the reconciliation.
And if the expected purchase price is $3 million or more and SBA financing may be part of the buyer pool, I want to think about QoE readiness before the business ever reaches an LOI.
There is a big difference between answering a buyer's question and discovering a problem after the deal is already under contract.
Quality of Earnings in South Florida
The issues vary by business.
A Broward construction company may have project timing, subcontractor and receivable issues.
A Miami distributor may have inventory, supplier concentration and working-capital questions.
A Palm Beach healthcare or professional-services company may have different revenue, owner-compensation or customer-retention concerns.
I start with the economics of the business.
How does it make money?
When does it get paid?
What expenses are necessary?
How dependent is it on the owner?
How concentrated are the customers?
What changes after closing?
Those questions usually tell us where to look.
Thinking About Selling Your Business?
If you are considering selling a privately held business in Broward County, Miami-Dade County or Palm Beach County, particularly one with an expected value of $3 million or more, it makes sense to understand the financial issues a serious buyer and lender are likely to examine before the business goes to market.
My role is not to perform the lender's Quality of Earnings analysis.
My role is to help determine what the business is likely worth, understand the earnings supporting that value, identify issues likely to receive scrutiny during due diligence, and prepare the transaction before those questions arrive.