Quality of earnings reviews for Charlotte-area manufacturers

Most owners first meet the phrase "quality of earnings" in a letter of intent, usually in a sentence that makes the offer subject to one. It pays to understand it before that letter arrives, because this review is where the headline number gets confirmed, trimmed, or rebuilt, and in a manufacturing company it looks in places a generalist accountant rarely goes.

A rule change that widens who orders one

Private equity funds and strategic acquirers have ordered quality-of-earnings work on lower-middle-market deals for years. Individual buyers financed through the SBA often did not. That changes on October 1, 2026, when the SBA's updated lending procedures, SOP 50 10 8.1, take effect. For two acquisition types, an outside buyer's first acquisition and an existing company buying another in its industry group, the lender must obtain a quality-of-earnings report in addition to a business valuation whenever the business purchase price is $3 million or more, measured before buyer equity or seller financing is applied.

The SOP is specific about the contents. The report must be prepared by an independent financial professional for the lender, and it may not be prepared by or for the buyer or the seller. It must reconcile the accountant-prepared statements, the tax returns, the internal statements, and IRS transcript data into a normalized earnings figure. It must include a cash proof that rebuilds receipts and disbursements from bank statements for the trailing twelve months and the last two fiscal years. It must document every add-back, and it must assess customer concentration and whether revenue and margins are likely to hold after the sale. The lender then sizes the loan from the report's earnings, not from the seller's.

For a Charlotte-region company between $5M and $20M, the practical result is that nearly every serious buyer, from a search funder carrying an SBA loan to a fund writing its own check, now arrives with a quality-of-earnings review in the plan.

What the review rebuilds

A quality-of-earnings review is not an audit and does not issue an opinion on the statements. It answers a narrower question: are the earnings a buyer is paying a multiple on real, repeatable, and measured correctly? The work usually runs through:

• Revenue timing. When a sale is booked relative to shipment, and whether December shipments or bill-and-hold arrangements pulled revenue into the wrong year.
• Each add-back. Owner pay against a market salary, personal expenses, related-party rent, one-time legal or equipment costs. Our FAQ on legitimate add-backs lists the usual ones, and each needs a document behind it.
• Cash to accrual. Plenty of owner-run shops keep cash or modified-cash books. The reviewer restates revenue and cost into the months they belong to.
• Proof of cash. Bank deposits against reported revenue, month by month.
• Margin by customer. Often the first time an owner sees which large account is really carrying the plant, and which one is quietly costing it.

Where a plant gets tested harder

Plants carry balance sheet items that service companies do not, and those items move reported earnings directly.

Inventory costing. How raw material, work in process, and finished goods are valued, whether standard costs were updated after material prices moved, and how overhead is absorbed. A company that capitalizes more overhead into a growing inventory reports higher profit than one that expenses it, and the reviewer normalizes the difference.

Open jobs and percentage of completion. For a structural steel house or a custom equipment builder, the cost-to-complete estimate on open jobs effectively sets reported earnings. Reviewers test those estimates against how past jobs actually finished, which is why fabrication valuations lean so hard on job costing.

Scrap, rework, and dead stock. A rack of parts made for a customer who left three years ago is a write-down waiting to happen. Take it before the review rather than letting the review take it for you.

Deferred maintenance. The SOP names deferred maintenance as an adjustment the report must identify. A plant that skipped maintenance to lift margin will see that margin normalized back down.

Tooling, surcharges, and freight. Who pays for tooling, how steel or resin surcharges are billed, and whether freight is recovered all shape gross margin in ways summary statements hide.

Commission your own, or wait for the buyer's?

Because the SBA now requires the lender's report to be prepared for the lender, a seller-commissioned review cannot stand in for it on an SBA-financed deal. It still earns its cost for a different reason. A sell-side review done before going to market finds the problems while there is time to fix or explain them, gives the seller a defended earnings figure for the marketing materials, and shortens every buyer's review because the hard questions already have documented answers. Our FAQ on quality of earnings covers why that tends to pay for itself.

Ninety days of preparation that show up in the price

Reconcile first. Tie each of the last three years of statements to the filed return and write down the reason for every difference.

Build the add-back binder. One page per adjustment, with the payroll record, invoice, lease, or settlement attached.

Count and reserve inventory. Take a physical count, write off what is obsolete, and document how standard costs were set.

Close out the open jobs honestly. Update cost-to-complete on every open project with actual hours and material to date.

Gather bank statements. Two full fiscal years plus the current year, since the cash proof will ask for every month.

Most of this also sits on the due diligence checklist. For a rough sense of what reviewed earnings might support before any of it is done, the valuation calculator walks through adjusted EBITDA and a sector multiple band, and a confidential call to (704) 343-6770 gets an advisor's read on your actual numbers.