One of the most important distinctions under the new SBA framework is this: a business valuation and a Quality of Earnings analysis answer two very different questions. The valuation asks what the business is worth. The Quality of Earnings analysis asks how reliable the earnings supporting the transaction are.

A business valuation considers expected economic benefits, risk, market evidence, tangible and intangible assets, industry conditions, and the other factors necessary to develop an opinion of value. A QoE goes deeper into the underlying earnings themselves. Are reported revenues supported? Are margins sustainable? Are the seller’s add-backs legitimate? Are related-party expenses at market levels? Does owner compensation require normalization? Are there unusual or nonrecurring items affecting historical results? Does cash activity support the company’s reported operating performance?

Neither analysis replaces the other. In fact, when properly performed, they complement one another. Value depends heavily on expected future economic benefits, and QoE helps determine how much confidence the lender should place in the historical earnings being used to estimate those benefits.

Different questions. Different analyses. Both important.

Experience Matters Most.