Verify the Seller's Financials Yourself

Reconcile the bank deposits to the reported revenue. Get 12 months of business bank statements and add up the deposits, then compare that to the sales on the P&L and the gross receipts on the tax return. The three should broadly agree. Large unexplained gaps, deposits well below reported sales, or reported sales the deposits can't support, are the first thing to run down. Cash businesses need extra scrutiny here, and remember any revenue that isn't on the tax return doesn't count for your loan.

The ones you can document. Accepted add-backs typically include the owner's compensation a new owner won't replace at the same level, depreciation and amortization, interest on debt being refinanced, and clearly identifiable one-time or personal expenses. Struck add-backs are the ones with no paper trail or that are really recurring costs of running the business. Because the lender rebuilds seller's discretionary earnings from the tax returns, every add-back needs to trace to something filed.

It's confirming the seller's internal P&L matches their filed federal tax returns. Ask for three years of business returns and lay them next to the P&Ls the broker provided. The SBA lender will verify the returns against IRS transcripts, so any place the internal numbers are rosier than the filed numbers is a place your deal, and your price, will get corrected at underwriting. Better to find it yourself before the LOI.

At a business purchase price of $3 million or more, it isn't optional: SOP 50 10 8.1 requires the lender to get one for a first-time purchase or a business expansion, and the cost can count toward your equity injection. Below that, it's worth it on more complex deals, when the books are disorganized, when there's significant inventory or accrual accounting, or when a lender or equity partner requires one. A formal QoE can cost into the five figures, so on a smaller, clean main-street deal a buyer's own reconciliation plus the lender's underwriting often covers the ground. The point is that someone competent verifies the numbers before you're bound, and that it's not the first time anyone has looked.

It depends on the price. Under SOP 50 10 8.1, when a first-time buyer (or an existing owner expanding) pays a business purchase price of $3 million or more, not counting owner-occupied real estate, the lender must obtain an independent Quality of Earnings report, including a cash proof that ties bank statements to the income statement and tax returns, and must size the loan to the QoE's earnings. It can't be prepared by or for the seller, and a QoE you commission yourself needs a review by the lender's vendor. Below $3 million, a buyer can do a lot of the verification themselves: reconcile bank deposits to reported sales, tie the P&L to the filed tax returns, and pressure-test the add-backs. Either way, the SBA lender will independently verify the seller's returns against IRS transcripts.