The SBA Quality of Earnings documents should support the revenue, expenses, add-backs, cash collections, balance-sheet accounts, and overall sustainability of a business’s earnings. A complete document package allows the analyst to verify the company’s financial information rather than relying only on management explanations. Under SBA guidance, the Quality of Earnings process includes financial reconciliations, adjustment testing, revenue analysis, and a Cash Proof for the trailing twelve-month period and the prior two fiscal years. Providing the right SBA QoE documents early can make the analysis more efficient and reduce delays.
Peak Business Valuation performs SBA Quality of Earnings analyses and can help identify the documents needed for an SBA transaction before the engagement begins. Schedule a free consultation below to better understand what documents may be needed for an SBA quality of earnings report.
Why Are SBA Quality of Earnings Documents Important?
A Quality of Earnings analysis follows the available evidence. If a business reports $800,000 of EBITDA, for example, the analyst needs documentation to determine whether the reported earnings and proposed add-backs are supported. Missing documents can also slow down the process. Bank statements, tax transcripts, customer sales reports, and detailed general ledgers often take longer to obtain than basic financial statements. Providing the requested documents early gives the analyst more time to identify and resolve questions before the report is completed. The SBA SOP 50 10 resource page provides the governing lending procedures for SBA loans.
Financial Statements for an SBA QoE
The analyst will generally need monthly and year-end income statements and balance sheets for the periods being analyzed. Monthly financial statements are especially useful because they help identify seasonality, unusual expenses, changes in margins, and other trends that may not be visible in annual statements. Whenever possible, provide financial statements directly from the accounting system. If accountant-prepared statements differ from internal financial statements, provide both versions so the differences can be reviewed.
Are Tax Returns and IRS Transcripts Required?
Federal business tax returns provide an important source for verifying reported revenue, expenses, and taxable income. Provide complete tax returns, including schedules and attachments. An abbreviated or summary return may not contain information needed to evaluate items such as depreciation, officer compensation, or balance-sheet accounts. IRS transcripts can also help confirm that the tax return provided to the lender agrees with IRS records. The IRS Get Transcript service provides information about available transcript records.
Documents Needed for an SBA Cash Proof
The SBA Quality of Earnings documents for the Cash Proof should include complete bank statements for every business account used during the review periods. This includes operating, deposit, sweep, payroll, and merchant accounts when applicable. Statements should include all pages and transaction details. The analyst may also need merchant-processing statements, deposit reports, accounts receivable detail, and explanations for significant transfers or non-revenue deposits. For example, loan proceeds, owner contributions, transfers between accounts, tax refunds, and insurance proceeds should be identified so they are not incorrectly treated as revenue.
Why Is the General Ledger Needed?
The general ledger connects the financial statements to the underlying transactions. It is particularly important when reviewing proposed add-backs. An annual expense labeled “miscellaneous” does not tell the analyst whether the expenses were personal, nonrecurring, or necessary to operate the business. A detailed general ledger allows the analyst to trace significant expenses back to the underlying transactions and supporting documentation.
Documents That Support Revenue
Revenue testing may require monthly sales reports and, when available, customer-level detail. Customer and sales information can help identify customer concentration, lost customers, new customers, unusual sales increases, and changes in the business’s revenue mix. Depending on the business, supporting documents may also include customer contracts, purchase orders, backlog reports, renewal agreements, and work-in-process schedules. The goal is to determine whether historical revenue is supported and whether it is reasonably expected to continue after the transaction.
What Supports Expenses and Add-Backs?
Add-backs should be supported by more than a seller or broker schedule. Depending on the adjustment, supporting documents may include payroll records, W-2s, 1099s, benefit information, invoices, lease agreements, related-party agreements, and other transaction-level records. For each significant add-back, the analyst should be able to determine what the expense was, how much it cost, and why it should be adjusted from earnings. Peak’s Quality of Earnings checklist provides a useful starting point for organizing these documents.
Balance-Sheet Documents
Balance-sheet accounts are also an important part of an SBA Quality of Earnings analysis. Common supporting documents include accounts receivable and accounts payable aging reports, inventory detail, debt schedules, fixed-asset records, prepaid expenses, accrued liabilities, and owner or related-party balances. These records can identify issues that are not visible from EBITDA alone, such as slow collections, obsolete inventory, or liabilities that may need to be considered in the transaction.
Transaction Documents
The analyst should also receive the documents that explain the proposed transaction. These may include the purchase agreement, letter of intent, sources and uses, purchase-price allocation, seller financing terms, and schedules identifying assets or liabilities that will not transfer. These documents help determine what is actually being purchased and whether the historical financial results are comparable to the business that will exist after closing.
How To Organize SBA Quality of Earnings Documents
A simple folder structure organized by document type and period can make the process much easier. Keep original filenames when possible and clearly identify revised documents. If multiple versions of a financial statement or report exist, indicate which version is current. It is also helpful to maintain a simple document index showing what has been provided and what remains outstanding. The SBA Quality of Earnings documents should ultimately tie to the same financial periods used in the business valuation and lender underwriting.
SBA Quality of Earnings Document Checklist
A typical SBA QoE document request may include:
- Financial statements
- Federal tax returns and IRS transcripts
- Bank statements
- General ledgers
- Sales and customer reports
- Accounts receivable and payable aging
- Payroll and compensation records
- Add-back support
- Debt and fixed-asset schedules
- Inventory records
- Transaction documents
The exact request will vary based on the size, industry, accounting system, and complexity of the business.
How Peak Can Help
At Peak Business Valuation, we perform SBA Quality of Earnings analyses and SBA business valuations for privately held businesses. Contact Peak before the engagement begins to confirm the document request, review periods, and expected timing.
