📊 Quality of Earnings Reports for Small Business Acquisitions

You're under LOI on a $3M revenue HVAC business. Seller's tax returns show $700K in EBITDA. Your QoE report comes back at $470K adjusted EBITDA.

Not a disaster. Just reality. That's the difference between a tax return business and a bankable business.

The $25K report found $120K in personal vehicles mixed with fleet costs, $85K in prepaid contracts recognized too early, $95K in family payroll above market rates, $60K in personal travel, and $40K in one-time legal expenses.

Every first-time buyer thinks their seller is honest and their deal is clean. Most sellers ARE honest. But their bookkeeping wasn't designed for a sale—it was optimized for taxes. A Quality of Earnings report translates "tax EBITDA" into "what you're actually buying."

Here's what that translation looks like and when it's worth paying for.

A Quality of Earnings report rebuilds recurring, cash-backed EBITDA from original source documents. Not the P&L. Not what the seller says. What the bank statements, invoices, and contracts prove.

The firm traces every revenue line to deposits. Every expense to invoices. Every addback to documentation. You're buying evidence, not stories.

They focus on three questions:

A typical report runs 30-60 pages:

Typical turnaround is 2-4 weeks for SMB-focused QoE reports.

The same issues appear in nearly every small business QoE due diligence analysis. Here's what they mean for the EBITDA you're buying.

What sellers do: Run $120K in auto expenses through the business—three luxury vehicles, full insurance, maintenance, fuel. Add back the entire $120K claiming "these are my personal cars."

What QoEs find: Two vehicles are purely personal. One truck is legitimately used for service calls. Plus you'll need vehicles for your field team post-close. Real operating cost: $40-50K annually. Seller claimed $120K addback, legitimate addback is $70-80K (net overstatement: $40-50K).

What sellers do: Sell annual maintenance contracts. Customer pays $2,000 upfront in January. Seller books all $2,000 as current revenue instead of recognizing $167/month as service is delivered.

What QoEs find: $85K in "revenue" this year is actually deferred revenue—a liability you owe customers in future service. Maybe $30K was earned in the current period. The rest is next year's earnings pulled forward (current year overstated by $55-85K depending on contract timing). You inherit the service obligation without the cash (seller already spent it).

What sellers do: Spouse at $55K as "office manager" who works 10 hours/week. Two adult children at $20K each for minimal summer help. Seller adds back $95K claiming "family won't be on your payroll."

What QoEs find: The work is real but the compensation is inflated. Market rate for that office work: $35K. Summer help: $12-15K total. Seller claimed $95K addback, legitimate addback is $25-30K (net overstatement: $65-70K).

What sellers do: $60K in travel expenses, all added back as "personal vacations." Hawaii in June, monthly flights to second home, Florida "conference" with 5 days of golf.

What QoEs find: $45K is legitimately personal. But $15K represents real business needs—annual trade show, key vendor visits, training events. You'll have similar costs. Seller claimed $60K addback, legitimate addback is $40-45K (net overstatement: $15-20K).

What sellers do: $40K in legal expenses, entirely added back as "one-time lawsuit."

What QoEs find: $25K was the lawsuit settlement (legitimately non-recurring). $15K was routine legal—contract reviews, employment advice, corporate maintenance. Historical pattern shows $10-20K in legal annually. Seller claimed $40K addback, legitimate addback is $25K (net overstatement: $15K, plus you should budget $15-20K in ongoing legal costs).

Seller's EBITDA: $700K
QoE-adjusted EBITDA: $460-510K
At 4x multiple: $760K-$960K in avoided overpayment

This is why you buy the report.

Across all five adjustments, verify contracts, invoices, payroll, and bank statements—and always ask what you'll actually need to spend post-close.

Not every deal needs a full forensic QoE. Match your review depth to deal complexity and risk.

Agreed-Upon Procedures ($5K-$10K): Checklist-based verification with no professional opinion. "Did this revenue hit the bank? Do these expenses have receipts?" Good for sub-$500K EBITDA deals where you're comfortable doing most analysis yourself.

Limited-Scope QoE ($10K-$20K): Focused review of specific risk areas you define. Maybe you only care about revenue recognition and working capital. Or you want owner expenses verified but trust the rest. Good for $500K-$1.5M EBITDA with clean books.

Full QoE ($20K-$40K): Complete financial rebuild with professional opinion. Every revenue stream, every expense category, full balance sheet analysis. Required for SBA financing. Smart for EBITDA over $1M or deals with significant addbacks.

Decision framework: Under $750K EBITDA with clean books → Limited Scope. Over $1M EBITDA or family involvement → Full QoE. SBA financing or multiple entities → Full QoE (required).

The risk isn't the $25K report. The risk is buying $500K less EBITDA than you thought at a $2M price difference.

Here are five commonly used SMB QoE providers:

Midwest CPA (midwest.cpa) — Publishes fixed-fee bands: $12K-$15K (small deals) and $14K-$23K (under $10M EV); typical 2-4 week timeline.

Ampleo (ampleo.com) — Offers an online QoE quote builder where buyers can estimate cost instantly.

Guardian Due Diligence (guardianduediligence.com) — Specializes in buy-side work for searchers and first-time buyers in the main-street market.

SMB Diligence (smbdiligence.com) — Focused on sub-$5M EV businesses with clear, practical reporting for self-funded buyers.

Rapid Diligence (rapiddiligence.com) — Starts at $8,900+ for full QoE; cites 3-4 week turnaround and transparent scope. Mention EBIT for $250 off.

Standard market pricing for sub-$5M deals: $7K-$30K depending on size, complexity, and timeline. Rush fees can add 25-50%.

Get a sample report before signing. Make sure they show actual evidence—not just a spreadsheet with notes. You're paying for documentation, not opinions.

Your report arrives as a 50-page PDF. You'll read 5 pages closely. Here's what to focus on:

Executive summary first: What's the adjusted EBITDA? What were the biggest findings? Anything that breaks the deal?

Then the EBITDA bridge: Line-by-line from seller's number to yours. Every adjustment should reference supporting documentation. If it says "$85K revenue timing adjustment," there should be a schedule showing which contracts, which dates, which amounts.

Cash proof section: Revenue on the P&L should match deposits in the bank statements. If the P&L shows $3M in revenue but only $2.7M hit the bank, you have a serious problem. Don't close until you understand where $300K went.

Working capital analysis: What's normal? What's on the current balance sheet? You'll fund any shortfall at close. If normal working capital is $400K and the balance sheet shows $250K, you need to bring $150K more cash to closing.

Debt-like items: Deferred revenue, unpaid taxes, warranty obligations, accrued vacation, customer deposits. These reduce enterprise value dollar-for-dollar. A $100K deferred revenue balance is effectively $100K of debt.

Then call your provider and ask five questions:

A good provider doesn't just deliver a report. They help you understand what it means for your valuation, your financing, and your first 90 days of ownership.

Some findings don't just adjust price—they kill deals. Walk when you see:

EBITDA adjustments exceed 25%. If reported EBITDA drops more than a quarter after normalized EBITDA adjustments, either the books are a mess or the seller misrepresented the business. Both are deal-killers.

Revenue doesn't match deposits. If P&L revenue is $3M but only $2.5M hit the bank, where's the other $500K? Ghost customers, pulled-forward revenue, or fraud. Don't try to solve this puzzle.

Significant commingled personal accounts. When mortgage payments, grocery bills, and vacation expenses run through the business account, you can't separate truth from fiction.

Unpaid payroll taxes over $50K. You may inherit this liability as the new owner. It's also evidence of cash flow problems. Not worth the risk.

Material misrepresentation. Seller claimed equipment was owned but it's leased. Inventory is obsolete. Key customer already left. One lie means more lies.

A QoE's purpose is validation, not price shaving. If validation fails, walk.

1. Negotiate from data, not feelings.

Don't say: "I think the EBITDA is lower."
Say: "Your QoE shows $470K normalized EBITDA. At 4x, that's a $1.88M valuation, not $2.8M. Here's the adjusted EBITDA bridge from your own financials."

2. Focus on recurring vs. one-time.

A $50K equipment purchase is one-time—don't adjust for it. But $50K in annual equipment maintenance the seller didn't disclose is recurring—absolutely adjust for it. The QoE separates these clearly.

3. Update your pro forma immediately.

Your operating plan was built on $700K EBITDA. The QoE shows $470K. Redo your cash flow projections, your debt service coverage, your hiring plan. Don't close on old assumptions.

A $25K Quality of Earnings report for small business acquisition is deal insurance. It confirms what you're purchasing and typically saves 10-30x its cost in avoided overpayment or prevented disasters.

Every buyer thinks their deal is clean. Every seller believes their books are accurate. The QoE translates between these two realities using source documents and evidence.

You're not buying a report. You're buying certainty about what the business earns, confidence in your valuation, and protection against overpaying for earnings that don't exist.

Get the QoE. Read it carefully. Negotiate from what it shows, not what you hoped. And don't close until you know exactly what you're buying.

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Disclaimer: This guide is for educational purposes only and does not constitute legal, financial, tax, or investment advice. Business acquisitions involve significant risks, and outcomes can vary widely based on individual circumstances. Always consult with qualified professionals including attorneys, CPAs, and financial advisors before making acquisition decisions. The EBIT Community does not guarantee the accuracy of information provided or the success of any acquisition strategy. Past performance and examples do not guarantee future results.