What Is a Quality of Earnings Report, and Will I Need One to Sell My Business?

A quality of earnings report is an independent check of whether the profit you report is real, landed in the right period, and likely to continue under a new owner. From October 1, 2026, the SBA requires one on any acquisition financed at $3 million or more. The lender orders it, not you.

That last part is the change.

What does the accountant actually look at?

Your tax return, but not only that. They rebuild revenue from the documents sitting underneath it, month by month, going back roughly three years, and then every adjustment you made to your own numbers gets tested against whatever evidence still exists. It is not an accusation. Think of it as arithmetic redone by somebody who has no stake whatsoever in the answer coming out well.

Most owners sell on a figure they built themselves.

You start with the tax return. Add back the vehicle. Add back the family member on payroll, the conference in Scottsdale, the phone bill, the health insurance. Arrive at a bigger number, and that bigger number is what the business gets priced on.

Nothing dishonest about any of that.

The adjustments are usually fair. What changes on October 1 is that somebody the bank is paying, rather than somebody you hired, now decides which of them survive contact with the evidence.

In the cleanup work I take on, the gap between the profit an owner quotes and the profit that survives an honest recount usually runs 10% to 25%. Those are practitioner observations, not published figures. The range is wide for one reason, and it has nothing to do with honesty: it depends almost entirely on how carefully the books were kept during the years when nobody was checking them. An owner who closed every month and kept the receipts tends to land at the low end of that range, sometimes below it entirely. An owner whose books were reconstructed each spring to file a return tends to land above it, occasionally well above.

Why the number matters more than it used to

There is a second change, and together they bite harder than either does alone. First-time acquisitions and owner buyouts must now clear 1.25 times the loan payments, measured on historical or adjusted earnings rather than on what anybody projects. Forecasts no longer count.

So the surviving figure does more than inform your buyer, it sets the hard ceiling on what that buyer is permitted to borrow from the bank. Nobody negotiates around it.

Take $200,000 off a business priced at four times profit and you have taken $800,000 off the price.

Worse, the loan shrinks too, so a buyer who still wants to pay you may simply no longer be permitted to.

Which adjustments usually get challenged?

The last row costs sellers more than the other four combined. One unusual year explains itself in a sentence. Three consecutive years of a one-time expense is not an explanation, it is a pattern, and reviewers have a name for it.

How early should I start?

Earlier than feels necessary.

Three years is what gets opened. Tidy your books six months out and you have tidied six months, which leaves thirty months exactly as they were.

None of the five items above is hard. Every one is close to impossible to fix backwards. You cannot retroactively write a note that was supposed to have been written at the time, and rebuilding three years of job costing while a buyer waits is both the worst moment to attempt it and, almost always, the moment people find themselves attempting it.

Books already behind? Cleaning up books that have fallen behind comes first, long before any of this applies. Current but thin? A real monthly close with the reports that matter does most of the remaining work on its own.

The honest answer

Owners hear about this rule and assume it is being done to them.

For a business with clean records the opposite holds. A low opening offer is rarely the expensive part of a sale, and most sellers survive one comfortably. What costs real money is a buyer who gets nervous in week six and reopens a price you already shook hands on, by which point you have burned four months, a lawyer's retainer, and a good deal of your own patience. Clean records do not prevent that conversation because a buyer decides to be generous. They prevent it because there is nothing left to find.

An independent report confirming your numbers ends that argument before it begins, largely because the person who wrote it answers to the bank rather than to you. You defend nothing. You hand over a piece of paper.

October 1, 2026 is the date. Whether the rule costs you money or protects it gets settled years beforehand, by the same unglamorous habits that decide whether a service business is sellable at all.

Start now and it is bookkeeping. Start later and it becomes a negotiation you never planned for, conducted from the weaker side of the table.