Glossary
QoE — Quality of Earnings
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What it is
A QoE is a CPA firm rebuilding the earnings to show what a new owner would actually take home. It's different from a tax return (which is prepared to minimize tax, not to show true earnings) and different from a broker-prepared P&L (which is prepared to sell the business, not to verify it).
What a QoE review covers
- Revenue verification. Reconciling reported revenue to bank deposits, POS data, and tax returns.
- Add-back validation. Testing each claimed add-back against the general ledger to confirm it's truly discretionary, non-recurring, or personal.
- Capex normalization. Identifying ongoing capex requirements that the seller has been treating as one-time.
- Working capital analysis. Tracking AR aging, inventory turnover, and AP patterns to identify trends the seller may not have disclosed.
- Customer concentration. Top customer concentration as % of revenue.
- Vendor concentration. Top vendor concentration as % of COGS.
- Related-party transactions. Rent paid to a related party, family members on payroll, etc.
- One-time events. Identifying true one-time events vs. recurring "one-time" expenses.
When to commission one
For any deal above roughly $250K purchase price, yes. It costs a small fraction of the deal. It often pays for itself many times over — either in the price you renegotiate, or in the deal it stops you doing.
The QoE vs the listing's SDE
The listing's SDE is the seller's number. The QoE's reconstructed SDE is the lender's number. The two are typically different — and the lender's number is the one that matters for financing. Expect the QoE figure to come in below the listing figure. How far below is not predictable from the outside and any source quoting a standard percentage is guessing — the gap depends entirely on how the seller built their number and how much of it survives evidence.
New York-specific notes
- NYS labor costs (workers' comp, statutory disability, PFL, UI) should be verified as properly expensed — some sellers miscategorize these.
- NYC taxes (Business Corporation Tax, UBT, CRT) should be verified as properly accrued and paid.
- Sales tax collected from customers is a liability — verify the seller has been remitting correctly. The bulk-sale notice process protects against unpaid sales tax.
- For NYC food service targets, DOHMH inspection history is a QoE-adjacent diligence item — operational problems that affect revenue.
The full guide: Quality of earnings: what a QoE report checks.
Frequently asked questions
When is a quality of earnings review worth the cost?
It scales with what you are risking. It costs a small fraction of the deal and often pays for itself many times over, either in the price you renegotiate or in the deal it stops you doing. On an SBA change of ownership the question can be settled for you: a QoE is required where the purchase price is $3 million or more.
How is a QoE different from an audit?
An audit asks whether the statements comply with an accounting framework. A QoE asks a narrower, more useful question for a buyer: how much of the reported cash flow is real, sustainable and available to a new owner. Different question, different work.
Whose number does the lender use?
The QoE's. The listing's SDE is the seller's number and the reconstructed figure is the lender's, and the SOP requires the lender to use the QoE earnings in its debt service coverage determination. Expect the QoE figure to come in below the listing, and price off the lower one.
Educational only — not legal, tax, lending, or investment advice. Confirm specific rules, rates, and forms with the relevant New York State agency, attorney, CPA, lender, or insurer before acting. See the editorial policy and methodology for how sourcing and review work.