Quality of Earnings Analysis
Every transaction rests on one number: what the business actually earns. A Quality of Earnings analysis tests that number independently. It validates reported earnings, normalizes adjustments, proves out cash, and surfaces the issues that change price, structure, or loan size.
GCF’s Quality of Earnings practice is led by Michael Reed, CPA, ABV, CFF. It is staffed by a CPA-led team that does nothing but transaction advisory and QoE work. Our earnings conclusions hold up under buyer diligence, credit review, and investment committee scrutiny because they were built to be examined.
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Deal Integrity℠ Starts With the Earnings Number
Most deals do not fall apart because someone disagreed about a multiple. They fall apart because the earnings number moved.
An add-back you can’t trace, revenue that bank deposits do not support, working capital that was never funded, owner compensation that was never normalized. Each one is small on its own. Together they reprice the deal, usually late, when the parties have the least room to absorb it.
Deal Integrity℠ means resolving those questions early, on a documented basis, so that everyone downstream is working from the same defensible foundation:
Reported financials → validated, normalized earnings → supportable value → financing and structure that hold
When that chain is intact, the transaction moves. When it breaks anywhere along the line, someone pays for it in price, in equity, or in time.
Quality of Earnings Validates Earnings. Valuation Determines Value.
A Quality of Earnings analysis doesn’t give an opinion on value. That’s the business appraiser’s job.
The job of a QoE is to establish that earnings are real, repeatable, and sustainable, and to make sure the valuation is built on that complete picture. A business can look sound on paper. Earnings reconcile, add-backs are supported, and the numbers add up. But a spreadsheet can’t tell you who is actually paying the business, how dependable those payments are, or whether the cash flow will survive a change of ownership.
That’s the work a QoE does. It’s also why GCF assigns the two disciplines to separate teams.
What a GCF Quality of Earnings Analysis Covers
Our core scope is built around the four areas that most often move a deal.
Cash and financial validation
This covers proof of cash, tax return reconciliation, and a review of financial accuracy. We tie reported results to bank activity and filed returns instead of taking them at face value.
Working capital and balance sheet
We analyze working capital and review A/R and A/P aging. That way, the working capital the business actually needs to operate is known before it turns into a closing dispute.
Transaction risk and trends
We review customer and vendor concentration and analyze three years of history, including interim and trailing-twelve-month periods, to show whether performance is a trend or a one-time result.
Additional capabilities available by scope: additional entities, revenue stream analysis, projections, expense validation, and ARR, backlog, or WIP analysis.
“The objective of the QoE analysis is to assure our clients have greater visibility into the quality of a company’s financial statements and the run rate of cash flow on a go-forward basis.”
Choose Your Quality of Earnings Service
Quality of Earnings Analysis
Independent financial due diligence and earnings validation.
Quality of Earnings + Business Valuation
Two independent reports, coordinated under one engagement. Especially recommended for lenders and transactions requiring both services.
Order Quality of Earnings and Business Valuation
Quality of Earnings and Business Valuation, Coordinated
The earnings conclusion drives the value conclusion. When unrelated providers perform those two workstreams on different assumptions, the deal ends up with two earnings numbers and no reconciliation between them. GCF performs both.
One engagement. One information request. Two deliverables.
Independence is preserved on both sides — the conclusions are reached separately. What is shared is the underlying financial record, which is why the two reports reconcile instead of contradicting each other, and why one information request replaces two.
Order Quality of Earnings + Business Valuation
Standalone Quality of Earnings Analysis
For buyers, Independent Sponsors, investors, and other transaction professionals who need independent financial due diligence, GCF offers a standalone Quality of Earnings analysis.
Our CPA-led team validates reported earnings, tests adjustments, proves out cash, evaluates working capital, and identifies financial risks that could affect the transaction. The result is a clearer, documented view of the company’s sustainable earnings — without a business valuation.
Need a Quality of Earnings analysis on its own?
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Who Does the Work
Quality of Earnings is forensic financial analysis, not an add-on to a valuation. GCF runs it as a distinct practice with its own team, dedicated entirely to transaction advisory and Quality of Earnings work.
Michael Reed, CPA, ABV, CFF, Practice Leader
Michael leads GCF’s Quality of Earnings practice and oversees every engagement. He holds the CPA license along with two AICPA credentials: Accredited in Business Valuation (ABV) and Certified in Financial Forensics (CFF).
CPA-level professionals
They handle analysis, review, and client delivery.
Staff accountants
They perform detailed analysis, financial testing, and documentation.
The QoE team works separately from GCF’s valuation professionals. They don’t opine on value. They validate earnings. That separation keeps each conclusion independent, and the shared financial record keeps the two reports consistent.
When SBA Financing Is Involved
Starting October 1, 2026, SBA SOP 50 10 8.1 requires an independent Quality of Earnings analysis on 7(a) initial acquisition and business expansion transactions with a business purchase price of $3 million or more, excluding owner-occupied real estate. The QoE is in addition to the independent business valuation that every change of ownership already requires.
What lenders and brokers need to know:
- The lender orders the report. The QoE must be independent of the buyer and seller and prepared for the lender’s benefit.
- A proof of cash is required. It must cover the trailing twelve months and the last two fiscal years.
- QoE earnings drive debt service coverage. If those earnings don’t support the price and structure, the loan amount must come down.
In practice, the earnings figure from the QoE is the figure the loan is underwritten to, so diligence needs to start earlier, before price and structure are locked in.
GCF has served the SBA lending community for nearly 30 years. We deliver both required work products, the SBA-compliant business valuation and the Quality of Earnings analysis, under one coordinated engagement.
What We Need to Get Started
Choose whichever path is easier for your client. Either may lead to follow-up requests, but the second is much more efficient.
Option 1: Document set
- Balance sheet and P&L for the last 3 years plus TTM
- Trial balances and general ledgers for the last 3 years plus TTM
- Bank statements for the last 2 years plus TTM
- Tax returns for the last 3 years
Option 2: Accounting system access
- Read-only access to the accounting system (for example, accountant access to QuickBooks Online)
- Bank statements for the last 2 years plus TTM
- Tax returns for the last 3 years
What a QoE Finds That a Spreadsheet Doesn’t: A Case Study
Company profile: Annual EBITDA of $1 million · Proposed purchase price of $4.5 million (4.5x) · Reported customer concentration of 15%
What the file showed
Earnings were consistent across every source. All add-backs were supported. Bank reconciliations were clean. On paper, the deal was sound.
What our CPA team found
Our team traced bank statement activity at the transaction level and found that several “separate” customers were paying from the same bank account. The revenue was real, and the money was legitimate, but those customers were effectively one relationship. True customer concentration was 60%, not 15%.
Why it mattered
The earnings were still validated. What changed was how dependable they were. With 60% of revenue tied to a single relationship, cash flow repeatability came into question, and the 4.5x multiple behind the purchase price no longer held. The independent valuation came in below the proposed price.
The outcome
The lender had documented, defensible information before closing instead of after. That is the purpose of a Quality of Earnings analysis, whether the deal is restructured, repriced, or declined.
Details have been generalized to protect client confidentiality.
Why the Analysis Holds Up
We don’t automate this work or cut corners. Every engagement is staffed by credentialed professionals, and the conclusions are documented well enough to be examined line by line.
- CPA-led, forensic-grade analysis from a Quality of Earnings practice led by Michael Reed, CPA, ABV, CFF
- A dedicated QoE team focused entirely on transaction advisory and Quality of Earnings, working separately from our valuation professionals
- Accredited valuation professionals on the valuation side, holding designations that include ASA, ABV, CVA, CBA, and CPA
- Nearly 30 years of work with lenders, brokers, and transaction professionals nationwide
- In-house machinery and equipment appraisal (CMEA, EECA) when assets are material to the deal
- Offices nationwide, serving everyone from small community banks to the largest institutions in the country
Not every report labeled Quality of Earnings is the same. Some are checklists prepared by staff who aren’t trained for forensic work. Ours is built to show whether earnings will hold up, not just whether they add up.
Frequently Asked Questions
An independent examination of a company’s reported earnings to determine what the business actually and sustainably earns. It validates adjustments to earnings, reconciles reported results to bank activity and tax filings, tests working capital, and identifies risks such as customer concentration that could affect earnings after a change of ownership.
An audit provides an opinion on whether financial statements conform to accounting standards for a historical period. A QoE is transaction-focused: it asks what a buyer, lender, or investor can rely on going forward, and it examines the specific adjustments and cash flow assumptions the deal is priced on.
No. They answer different questions — what the business earns versus what the business is worth — and on SBA change-of-ownership transactions both are required. The two are most useful when coordinated, because the valuation should be built on the validated earnings.
Yes, and we recommend it. One engagement, one information request, two independent deliverables built from the same financial foundation.
GCF’s Transaction Advisory team, led by Michael Reed, CPA, ABV, CFF, performs the analysis. The team is dedicated entirely to transaction advisory and QoE work and is separate from our valuation professionals.
Earlier than most parties assume. Pre-LOI or early post-LOI work gives you room to resolve issues while the timeline is still flexible. Waiting until lender underwriting means findings arrive when price and structure are hardest to change.
Concentration affects how dependable earnings are, not whether they’re real. If a large share of revenue comes from one customer, or from several “customers” that are really one relationship, losing that relationship after closing can change both the value and the ability to repay debt. A QoE traces who is actually paying the business so that risk is known before the deal is priced.
The findings go to the parties who rely on the report. On a coordinated engagement, they also inform the independent valuation. Depending on what’s found, a deal may proceed as proposed, be restructured or repriced, or be declined. Either way, the decision rests on documented, defensible information.
Yes. Validated, traced adjusted EBITDA is far stronger support for a listing price than a seller-prepared adjustment schedule, and it reduces the likelihood of a retrade during buyer diligence.
A reconstruction of cash receipts and disbursements that reconciles bank statement activity to the income statement and the tax return for each period reviewed. It is the most direct test of whether reported revenue and expenses reflect what actually happened.
Reliance follows the engagement. For SBA and other lender-financed transactions, the engagement runs to the lender, and the report is prepared for the lender’s benefit. For sponsor, aggregator, and private credit engagements, the report is prepared for the acquiring or investing party.
Turnaround depends on scope and on how quickly the financial information arrives. We confirm turnaround in writing before work begins. We don’t compress the analysis to hit a date, because the earnings figure has to stand up to credit review.
Scope drives the fee. For a typical SBA change-of-ownership transaction, we price the coordinated valuation and Quality of Earnings engagement as a bundle. We confirm scope, fee, and turnaround in writing before work begins, so there are no open-ended engagements.
Get the earnings and the value right before the deal is under pressure.
Whether you are underwriting a loan, preparing a listing, or evaluating an acquisition, we will scope the work and confirm fee and turnaround in writing.
Talk to our Transaction Advisory team about a deal in process
Keep learning:
GCF’s Business Valuation Accreditations
Your GCF Business Valuation appraisal team has one or more of the following business valuation accreditations:
Accredited Senior Appraiser (ASA) – is recognized as having achieved the highest level of education, training, and report writing for business valuations. The ASA designation is the gold standard for a business valuation professional. (source: American Society of Appraisers)
Certified Business Appraiser (CBA) – a very prestigious credential in the eyes of all who are familiar with it as it has earned the reputation of being a difficult credential to obtain. (source: National Association of Certified Valuators and Analysts®)
Certified Valuation Analyst (CVA)- Certified in Financial Forensics (CFF): Granted by the AICPA to CPAs who demonstrate expertise in forensic accounting. (Source: American Institute of CPAs)
Accredited in Business Valuation by the American Institute of CPAs (ABV by AICPA) – a credential granted exclusively by the AICPA to qualified valuation professionals who demonstrate expertise in valuation through knowledge, skill, experience, and adherence to professional standards. (source: American Institute of CPAs)
- Accredited in Business Valuation (ABV) – credential is granted exclusively by the AICPA to CPAs and qualified valuation professionals who demonstrate considerable expertise in valuation through their knowledge, skill, experience, and adherence to professional standards. (source: American Institute of CPAs)
- Certified Public Accountant (CPA)
GCF has nearly 30 years of experience and expertise in business valuations and appraisals. An accredited appraiser receives extensive training, remains in good standing, and follows established industry practices to determine the value of a business.
GCF’s Machinery and Equipment Appraisal Accreditations
Expert Equipment Certified Appraiser (EECA) – Our appraisers are recognized with a deep understanding of valuation principles and extensive experience by the Institute of Equipment Valuation.
- Certified Machinery and Equipment Appraiser (CMEA) – a CMEA professional has the expertise and certification to conduct a third party machinery and equipment appraisal.
The GCF Business Valuation Process
