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Larger companiesQuality of earnings
What is a quality of earnings report? And should you order one before a buyer does?
What the report tests, when it gets ordered, what one firm charges, and what a late finding does to your price.
Preparing to sell
9 min read
Figures: CLA, june 1, 2026Eide Bailly, updated October 22, 2026Market Pulse through Q2 2026Read November 12, 2026
Legend Atty · Founder, BridgeBook
Published
What does a quality of earnings report test?
The short answer: a quality of earnings report is an outside accountant's test of the profit you say your company makes. As one accounting firm, CLA, puts it, "An audit asks, 'Are these numbers accurate?' A QoE asks, 'Are these earnings sustainable?'"[1] Buyers at this size usually order one after the letter of intent. You can order your own first.
- Time to a draft
- 4 to 6 weeksEide Bailly's account, updated October 2026[2]
- Value lost, one firm's example
- $3,000,000[3]From $500,000 less EBITDA, KSM, August 2026
- SBA rule, purchases from
- $3,000,000[4]Lender must get one, from October 1, 2026
The report starts from EBITDA: yearly profit before interest, taxes, depreciation and amortization. Then it tests adjusted EBITDA, which is EBITDA with one-time and personal costs added back. Each of those is an add-back: a cost a new owner won't have, added back to profit.
The accountants ask four things. Which earnings repeat next year? Does each add-back have paper behind it? Was revenue booked in the month it was earned? And how much working capital does the business need to run? ACG's December 2025 piece on GF Data's work names a common source of add-backs: personal costs the owner runs through the business[5].
The working capital question matters for your check. Working capital is the money tied up in running the business day to day: what customers owe you, plus inventory, minus the bills you owe. The report's answer often becomes the peg, the normal amount you and the buyer agree the business hands over at closing. Hand over less than the peg and the price goes down by the gap. Hand over more and it goes up.
Every figure on this page is another publisher's, named and dated, except one. The price example below uses the sold-deal data behind our calculator, whose top group is companies that sold for $5,000,000 to $50,000,000. Past that, we don't put a figure on a company.
How is it different from an audit?
An audit checks that your statements follow the accounting rules. A quality of earnings report asks whether the profit will still be there for the next owner. CLA's June 2026 piece sets the two questions side by side[1].
So audited statements don't replace the report. An audit can pass a year with a one-time contract, below-market rent paid to you or a cousin on the payroll. A buyer's accountants will pull each of those out.
Buyers expect the report from an outside firm that does them often, not from the CPA who keeps your books.
Who orders one, and when?
Usually the buyer does, after the letter of intent (LOI): the buyer's written offer, mostly non-binding, signed before due diligence. That's a buy-side report. One you order before going to market is a sell-side report.
At this size the buyer's report is expected. PKF O'Connor Davies wrote in September 2026 that they've long been standard at company values of $10,000,000 to $1,000,000,000[6].
Advice on when to start a sell-side report differs. One adviser quoted by ACG in December 2025 says three to six months[5] before a sale. Eide Bailly's page, updated October 2026, says 6 to 12 months[2] before going to market. Either way, it starts before the first buyer sees your numbers.
How long does one take?
About a month or a little more for the draft. Eide Bailly says most engagements take 4 to 6 weeks[2] from engagement to a draft report.
Those weeks land mostly on your controller. Expect a request list in the first week. It asks for three years of monthly statements, the general ledger and payroll records. It also asks for customer and vendor lists and the paper behind each add-back. Decide now who on your team answers it.
What does a quality of earnings report cost?
We found one firm that publishes a price list for these reports, so that's all we show. BD Emerson's page, dated July 2026, puts a buy-side report on a $15,000,000 to $75,000,000 deal at $45,000 to $90,000. It says sell-side work runs 10% to 30% higher[7]. That's one firm's list, not a survey of what firms charge.
Ask any firm for a fixed fee and a date for the draft, in writing. Ask who will do the work, and how many reports that person has done in your industry.
The outside figures on this page, in one place
| Question | What the source says | Source |
|---|---|---|
| How long to a draft | 4 to 6 weeks | Eide Bailly[2] |
| When to start, one view | three to six months before a sale | ACG Insights (GF Data)[5] |
| When to start, another view | 6 to 12 months before going to market | Eide Bailly[2] |
| Buy-side price, deals of $15,000,000 to $75,000,000 | $45,000 to $90,000; sell-side 10% to 30% higher | BD Emerson[7] |
| Where it's standard | Company values of $10,000,000 to $1,000,000,000 | PKF O'Connor Davies[6] |
| SBA lender must get one | Purchases of $3,000,000 or more, from October 1, 2026 | U.S. Small Business Administration[4] |
Source: Eide Bailly, Updated October 22, 2026[2]; ACG Insights (GF Data), December 2, 2025[5]; BD Emerson, Page dated July 25, 2026[7]; PKF O'Connor Davies, September 15, 2026[6]; U.S. Small Business Administration, Effective October 1, 2026[4]. Each row is one publisher's statement, not a market survey.
Does ordering your own raise the price?
We haven't found a published study that shows it does at this size, so we don't claim it.
What your own report does is move the finding earlier. You learn which add-backs hold up while you still set the price and the timing. The buyer's accountants will still do their own work. You'll have tested the same add-backs first.
What happens when a problem turns up late?
Often the price comes down, or the deal ends. By then you've signed an LOI and stopped talking to other buyers. A buyer who lowers the price after the LOI is called a re-trade. KSM, an accounting firm, wrote in August 2026: "Most deals don't fail because of what buyers find in diligence; they fail because of when it's found."[3]
KSM's own worked example: $500,000 less EBITDA cut the company's value by $3,000,000[3]. That's their example, not a rule.
A made-up example with our own figure: the buyer's accountants refuse one $400,000 add-back. Companies that sold for $5,000,000 to $50,000,000 went for a typical 4.9x EBITDA in the sold-deal data behind our calculator. At that multiple, the price drops by $1,960,000.
A made-up refused add-back of $400,000
| Line | Amount |
|---|---|
| Add-back the buyer's accountants refuse | $400,000 |
| Typical price per dollar of EBITDA, our top group | 4.9x |
| Taken off the price | $1,960,000 |
Source: IBBA and M&A Source, Second quarter of 2026[8]. Made-up example. The multiple is our top group's typical, companies that sold for $5,000,000 to $50,000,000.
Whatever the multiple is, the price drops by that multiple times $400,000. That comes off before any debt, escrow or working capital gap. Here's how the price becomes the wire.
What does the SBA's new rule change?
It matters if your buyer borrows through an SBA 7(a) loan. From October 1, 2026, on certain purchases of $3,000,000[4] or more, the lender must get a quality of earnings report.
At this size that's a smaller set of buyers, because one 7(a) loan tops out at $5,000,000[9]. Ask early whether an SBA loan is part of the buyer's plan. If it is, plan on a second set of accountants reading your books.
What we'd look at first, and what we don't do
Before any buyer sees your numbers, a dedicated advisor goes through them with you and your controller. Four things come first.
- Every add-back, with the invoice, lease or payroll record behind it. The ones with no paper get set aside.
- Monthly revenue for three years, checked against when the work was done or shipped.
- Twelve months of working capital, month by month, so the target you agree (the peg) isn't a surprise.
- Whether a sell-side report is worth ordering for your company, and how early.
We don't prepare quality of earnings reports. An accounting firm that does them often should. Your advisor helps you decide whether to order one and gets the books ready for whoever does the work.
Questions about quality of earnings
What is a quality of earnings report?
An outside accountant's test of your earnings and add-backs, written for a buyer or a seller before a sale.
How much does a quality of earnings report cost?
One firm, BD Emerson, publishes $45,000 to $90,000 for a buy-side report on a $15,000,000 to $75,000,000 deal. It says a sell-side report runs 10% to 30% higher. That's one firm's price list, not a survey.
How long does it take?
Most take 4 to 6 weeks from engagement to a draft, by one firm's account.
Do I need one if my statements are audited?
Often yes. An audit asks whether the numbers are accurate; a quality of earnings report asks whether the earnings will last.
More on what buyers count as profit: SDE and EBITDA, the working capital peg, how long a larger sale takes and why deals fall through.
Where these numbers come from
The sold-deal data behind our calculator: IBBA and M&A Source Market Pulse, closed deals. Our figures checked November 2, 2026.
- CLA (CliftonLarsonAllen), How a Sell-side Quality of Earnings Can Help Close a Business Sale. June 1, 2026. Read November 12, 2026.
- Eide Bailly, Understanding Quality of Earnings When Selling a Business. Updated October 22, 2026. Read November 12, 2026.
- KSM (Katz, Sapper & Miller), What's Actually Killing Deals in Diligence?. August 25, 2026. Read November 12, 2026.
- U.S. Small Business Administration, SOP 50 10 8.1, Lender and Development Company Loan Programs. Effective October 1, 2026. Read November 12, 2026.
- ACG Insights (GF Data), Why More Sellers Are Using Quality of Earnings Reports for M&A Deals. December 2, 2025. Read November 12, 2026.
- PKF O'Connor Davies, Quality of Earnings Goes Mainstream. September 15, 2026. Read November 12, 2026.
- BD Emerson, How Much Does a Quality of Earnings Report Cost?. Page dated July 25, 2026. Read November 12, 2026.
- IBBA and M&A Source, Market Pulse Q2 2026 Highlights. Second quarter of 2026. Read November 12, 2026.
- U.S. Small Business Administration, 7(a) loans. Opened November 12, 2026. Read November 12, 2026.
Outside figures are other publishers', named and dated, and they don't feed our calculator. How we use outside figures
Keep reading
- Larger companiesWhat Is a Working Capital Peg?The working capital you and the buyer agree the business hands over at closing, and how it moves your price.
- Larger companiesHow Long It Takes to Sell a Larger CompanyWhat happens in each month of a sale, from getting ready to the wire, and what a first offer commits you to.
- What it's worthSDE vs. EBITDAThe two ways buyers measure earnings, which one fits your business, and which add-backs count.
- SellingHow to sell a businessThe steps from a first valuation to closing day, and what to get ready before buyers look.
- Larger companiesAverage Profit Margin by Company SizeWhat companies your size keep as profit, by size and by industry, from tax returns the IRS publishes.
- Larger companiesWhat a $10,000,000 Company Is WorthWhen buyers stop counting your pay as profit, and who can buy a company this size.
One important decision. Two good places to start.
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