Quality of Earnings has officially entered the SBA lending conversation. With SOP 50 10 8.1 now effective, Quality of Earnings—or QoE—has become an important component of financial due diligence for qualifying SBA acquisition transactions. But what exactly is a Quality of Earnings analysis? At its core, a QoE asks a question that financial statements alone … Continue reading A New Layer of SBA Financial Due Diligence

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 … Continue reading A Business Valuation and a QoE Are Not the Same Thing

One of the most significant elements of the SBA Quality of Earnings requirement may also be one of the most revealing: Cash Proof. Financial statements tell us what the accounting records say happened. Tax returns tell us what was reported to the government. Bank statements tell us where the money actually went. A Cash Proof … Continue reading Cash Proof: Follow the Money

Few areas of a business acquisition generate more discussion than seller add-backs. Some are entirely legitimate. Some require judgment. Some should never have been added back in the first place. A Quality of Earnings analysis should not simply accept a schedule of adjustments because it was included in the offering memorandum or provided by the … Continue reading The Add-Back Question

A company's income statement may report $1 million of earnings. That does not necessarily mean the business generates $1 million of sustainable earnings. Quality of Earnings analysis is about understanding the difference. Reported results may include a one-time customer contract, an unusually profitable project, deferred maintenance, below-market rent paid to a related party, above- or … Continue reading Reported Earnings Are the Beginning, Not the Conclusion

Quality of Earnings is not only about expenses. Sometimes the greater risk is on the revenue side of the income statement. Consider two businesses generating identical annual revenue. Business A has hundreds of recurring customers, diversified across industries and geography. Business B generates 45% of its revenue from one customer whose contract expires six months … Continue reading Revenue Quality Matters Too

Quality of Earnings is not supposed to be another version of the seller's financial presentation. Its value comes from independence. The seller naturally wants to present the business in the strongest possible light. The buyer wants confidence that the business can perform after closing. The lender has a different responsibility: it must determine whether the … Continue reading Independence Matters