Glossary

QoE — Quality of Earnings

A CPA-led reconstruction of a business's real cash flow — separate from the tax return or broker-prepared P&L. The number a SBA lender will actually use to underwrite your loan.

What it is

A QoE review is a structured analysis (typically by a CPA firm) that reconstructs a business's earnings to reflect what a new owner would actually realize. 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. The cost of a QoE is typically a fraction of the deal value and frequently saves multiples of its cost in price renegotiation or by killing a bad deal before you close.

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 SDE to be 10–30% lower than the listing SDE.

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.

Where to go next

• Due diligence checklist — including the financial track
• SDE definition
• Add-back definition
• Working capital definition