Short definitions of the terms that appear in a quality of earnings report, an SBA lender engagement, or a cash proof, written by a CPA firm that performs the work. Each term is a linkable anchor.
An independent analysis of a company's earnings that tests whether reported profit is real, recurring, and supported by cash. A QoE report normalizes EBITDA for non recurring, non operating, and owner related items, analyzes revenue and margin quality, and measures net working capital. It is not an audit and does not express an opinion on financial statements; it answers whether the earnings a buyer or lender is relying on are sustainable.
A reconciliation of a company's reported revenue and expenses to the cash that actually moved through its bank accounts over a period. Every deposit and disbursement is extracted, classified, matched to the books, and reconciled to the financial statements and tax returns, with each difference explained. It is the procedure that catches unreported deposits, personal spending in the business, and earnings that exist only on paper.
An expense the seller or broker proposes adding back to reported earnings because it will not continue under new ownership: owner compensation above market, personal expenses run through the business, one time legal fees, and similar items. In diligence each add back is accepted, reduced, or rejected against source documents.
Earnings before interest, taxes, depreciation, and amortization, adjusted for the add backs and other normalizing items that diligence has accepted. Adjusted EBITDA is the earnings figure a purchase price multiple is applied to and the figure a lender uses to size debt.
Earnings restated to show what the business would produce on a recurring basis under normal conditions and new ownership: owner compensation reset to market, non recurring items removed, related party arrangements repriced, and timing differences corrected. Adjusted EBITDA is the most common form.
Current operating assets less current operating liabilities, excluding cash and debt. The peg is the level of net working capital the buyer and seller agree the business needs at closing; if the business delivers less, the price adjusts down, and if more, up. A QoE measures NWC monthly for the trailing twelve months to set the peg.
The ratio of cash available for debt service to required principal and interest payments. Under SBA SOP 50 10 8.1, acquisition loans require DSC of at least 1.25x and business expansion loans at least 1.15x, calculated on earnings from the required quality of earnings report.
The SBA's Standard Operating Procedure governing 7(a) and 504 lending. Version 8.1 requires, for Initial Acquisition and Business Expansion loans with a business purchase price of $3,000,000 or more that receive a loan number on or after October 1, 2026, an independent quality of earnings report with cash proof, engaged by the lender. The requirement is set out in Appendix 15.
An SBA loan purpose in which loan proceeds are used to acquire a business or an ownership interest in one. Initial Acquisition (a buyer acquiring a business) and Business Expansion (an existing business acquiring another) are the two change of ownership types subject to the quality of earnings requirement.
The most recent twelve consecutive months of financial results ending at the latest month end available, regardless of fiscal year. QoE reports present TTM alongside the two most recent fiscal years so that earnings can be seen on a current basis.
Earnings before interest, taxes, depreciation, and amortization plus the total compensation and benefits of one full time owner operator. SDE is the earnings measure used for smaller businesses where the buyer will replace the owner; adjusted EBITDA is used where management stays in place.
Rebuilding a company's income statement and balance sheet from bank and card transaction data rather than from the seller's books. The reconstructed statements are compared to the reported statements and the tax returns, and the differences are explained. It is the core of a cash proof and the starting point of a deal review.
The Excel workbook that accompanies a diligence report, containing every schedule in the report and the transaction level data behind it. A databook lets a buyer, lender, or reviewer trace any number in the report back to its source and reuse the analysis in a model or credit memo.
A non binding document in which a buyer sets out the proposed price and terms for acquiring a business. Most quality of earnings work happens after the LOI is signed; a deal review is performed before it, to test whether the seller's numbers justify the price the buyer is about to propose.
The requirement that the firm performing diligence has no financial interest in the outcome of the transaction and is engaged by the party relying on the report. SOP 50 10 8.1 requires the lender, not the borrower or seller, to engage the quality of earnings provider; Credex does not accept fees contingent on closing.