Quality of earnings (QoE) for a funeral home: what the report is and when SBA requires one

Every funeral home sale involves a story about earnings. The seller’s version comes from tax returns, a recast, and a list of add-backs. The buyer’s version starts out skeptical. A quality of earnings report is the independent referee: an accountant rebuilds the numbers from bank records up and says which earnings a new owner can count on.

This page defines the report and the rules around it. The test-by-test detail of what a reviewer examines is in our guide to quality of earnings for a funeral home.

What does a quality of earnings report actually measure?

Whether reported earnings are accurate, recurring, and backed by cash. The output is a normalized earnings figure, usually adjusted EBITDA, with every adjustment documented.

SBA SOP 50 10 8.1 describes a QoE as a report that “examines the reliability, sustainability, and accuracy of a business’s historical and projected earnings.” It must reconcile accountant-prepared statements, tax returns, internal statements, and IRS transcript data. It must also identify add-backs and adjustments for nonrecurring items, above- or below-market owner pay, related-party transactions, deferred maintenance, and differences between cash and accrual reporting, and assess how sustainable revenue is.

The core of the report is the cash proof: an analysis that “reconstructs cash receipts and disbursements by reconciling bank statement data to the income statement and tax return for each period under review,” covering the trailing 12 months and the last two fiscal years.

In our experience, the cash proof is where small funeral homes most often surprise a buyer. Deposits that run below booked revenue, personal expenses paid from the operating account, and preneed payments parked in the wrong account all surface here, months before they would otherwise appear.

How is a QoE different from other reports in a funeral home deal?

Each report answers a different question, and a lender may need several of them. Confusing them leads buyers to skip one they need.

The QoE feeds the others. The business valuation leans on its earnings, and the real estate appraisal’s market rent should match the rent the QoE uses to normalize earnings, as our definition of a specialty-use real estate appraisal explains.

When does SBA require a QoE for a funeral home purchase?

When an initial acquisition or business expansion has a Business Purchase Price of $3 million or more. The definition of that price is where buyers go wrong.

The SOP measures the threshold on the price in the purchase agreement minus the appraised value of any owner-occupied real estate, before buyer equity, seller debt, or other financing. A $3.4 million deal that includes a $700,000 building has a $2.7 million Business Purchase Price and falls below the line. Other rules matter too:

• Independence. The report must be prepared for the lender’s benefit and “must not be prepared by or for the seller.”
• Buyer-commissioned reports. A buyer’s own QoE can be used only after one of the lender’s approved vendors reviews it.
• Exceptions. Owner buyouts and ESOP or cooperative transactions are exempt, and so is the acquisition of an owner-occupied Special Purpose Property that is integral to the business, though the lender must document why.
• Use. The lender must use QoE earnings for debt service coverage; if coverage fails, the loan is reduced and more equity fills the gap.

Most funeral homes are likely to sit below the threshold. In an October 2025 Funeral Director Daily article, consultant Glenn Gould, citing NFDA’s firm count, said 68% of firms handle fewer than 200 cases a year. Buyers of smaller firms still often commission a lighter review, because the risks do not shrink with the price.

What funeral-specific items does a QoE test?

Revenue that is not really the firm’s, preneed income that arrives on its own schedule, and labor the owner performs for free. Generic reviewers miss these unless they know the industry.

• Cash-advance items. The FTC Funeral Rule defines a cash advance item as anything “obtained from a third party and paid for by the funeral provider on the purchaser’s behalf,” such as cemetery charges, clergy honoraria, flowers, and obituary notices. These pass through and should come out of revenue.
• Preneed income. Trust earnings, insurance commissions, and matured contracts can lift a year without repeating.
• Receivables. At-need balances awaiting insurance assignments can make accrual and cash results diverge.
• Owner labor. Unpaid on-call nights and embalming by the owner must be replaced at market cost.
• Call volume tie-out. Revenue should match the case register, by disposition type.

Our guide to reading a funeral home P&L shows where these items hide in the statements.

Try your own figures in the SBA loan DSCR calculator, which appears below. The program basics are on SBA’s 7(a) loans page.

How do sellers, buyers, and lenders each use a QoE?

Sellers use one to prepare, buyers to confirm price, and lenders to size debt. Each wants the same facts for different reasons.

Sellers commissioning a sell-side review find problems while there is time to fix them, and tighten their add-back schedule; our guide to funeral home add-backs shows which survive. A seller who has already reconciled deposits to the returns can answer the buyer’s reviewer in days rather than weeks, which keeps exclusivity from running out. The report also gives the seller’s own advisor a defensible earnings figure to anchor the asking price.

Buyers use the QoE to test price and terms. A cut to earnings becomes a price discussion or a structure change, such as a larger seller note or a holdback. Buyers also read the revenue section closely: the SOP asks the reviewer to assess customer concentration and whether revenue and margins will hold after the sale, which in a funeral home means asking how many calls follow the departing owner personally.

Lenders use it for coverage, and, under the SOP, must reduce the loan if QoE earnings do not support it. They keep the report in the credit file, and they compare its numbers with the business valuation, which relies on the same earnings.

What mistakes do parties make with funeral home QoE reports?

Most involve timing, independence, or scope. Watch for these:

• Assuming the total price sets the threshold. Real estate comes out first.
• Relying on a seller’s report for SBA. It cannot satisfy the requirement.
• Ordering it late. A QoE that arrives after the appraisal compresses exclusivity.
• Hiring a generalist. Missing the cash-advance and preneed issues produces the wrong number.
• Treating QoE cuts as negotiable opinion. A failed cash proof is evidence, not a view.
• Missing source records. Without bank statements, the case register, and preneed statements for every period, the reviewer cannot finish the cash proof.

For the wider picture of how earnings become value, start with our funeral home valuation hub.