Reference

The QoE glossary

The terms a buyer, a lender, and a seller need to mean the same thing by.

Quality of Earnings (QoE): An analysis of how sustainable and cash-backed a business's reported earnings are. Not an audit; it focuses on normalizing earnings, proving cash, and identifying risks that affect value and debt capacity.
Cash Proof: A reconstruction of revenue and expenses from bank and credit-card statements, reconciled to the income statement and tax returns. SOP 50 10 8.1 requires it over the trailing twelve months and the last two fiscal years.
Add-back: An expense added back to reported earnings on the argument that a new owner won't incur it: owner perks, one-time costs, above-market owner pay. A QoE tests each one against records and prior years.
SDE (Seller's Discretionary Earnings): Earnings before interest, taxes, depreciation, amortization, and one owner's total compensation and benefits. The number brokers price Main Street businesses on.
EBITDA and normalized EBITDA: Earnings before interest, taxes, depreciation, and amortization. "Normalized" replaces the owner with a market-rate manager, removes non-recurring items, and adjusts for cash-basis distortions. Lenders underwrite on this.
Net working capital (NWC) peg: The normal level of working capital (receivables plus inventory less payables, typically) a business needs to operate, set as the target in a purchase agreement. The closing adjustment is the difference between the peg and actual.
DSCR (Debt Service Coverage Ratio): Normalized earnings divided by annual principal and interest. SOP 50 10 8.1 sets a 1.25× floor for Initial Acquisition loans, measured on historical earnings.
SOP 50 10 8.1: The SBA's lender and development-company loan program standard operating procedure, version 8.1, effective for loans receiving a loan number on or after October 1, 2026. It introduced the QoE requirement and reorganized change-of-ownership rules into Appendix 15.
Appendix 15: The section of SOP 50 10 8.1 that defines the four change-of-ownership categories (Initial Acquisition, Business Expansion, Owner Buyout, ESOP/Cooperative) and their credit criteria.
Business purchase price: For the QoE trigger, the contract price for the business excluding the appraised value of owner-occupied commercial real estate, measured before equity injection or seller financing.
Equity injection: The buyer's cash contribution to an acquisition, 10% of total project cost under the SOP, with at least half from unborrowed cash.
Seller note on full standby: Seller financing on which no principal or interest is paid for the life of the SBA loan. It can count toward part of the equity injection.
PLP (Preferred Lenders Program): SBA lenders authorized to approve loans without prior SBA review. For them, the QoE must be engaged when the loan number issues.
Qualified Source: A business appraiser holding a credential the SBA recognizes (ASA, CBA, ABV, CVA, or BCA) and independent of loan production. Required for the business valuation on every change of ownership.
Customer concentration: The share of revenue from the largest customers. Above roughly 15–20% for one customer, lenders and buyers discount value and look for contracts.
Letter of Intent (LOI): The non-binding agreement on price and key terms that starts the diligence period. Most QoE engagements begin the week the LOI is signed.
CEPA: Certified Exit Planning Advisor, a credential from the Exit Planning Institute for advisors who help owners build value and plan ownership transitions.