Quality of Earnings
Know which earnings actually hold up.
Chief reconciles reported performance, tests proposed adjustments against source evidence, and establishes a normalized earnings base for valuation and underwriting.
01 · Reported
Reported EBITDA is the starting point.
Every figure starts from underlying evidence, with the source shown beside it.
Historical performance
Harbor Manufacturing (illustrative)
| Metric | FY 2024 | FY 2025 | TTM | Source |
|---|---|---|---|---|
| Revenue | $8.1M | $8.9M | $9.4M | Tax return · P&L |
| Gross profit | $2.44M | $2.58M | $2.63M | P&L |
| Operating income | $496K | $470K | $441K | P&L |
| Reported EBITDA | $688K | $652K | $615K | P&L · GL |
| Net income | $362K | $331K | $298K | Tax return |
New to QoE?
Meet the QoE.
Our field guide for SBA 7(a) lenders explains what a QoE should test, how it differs from valuation, and what to look for in a provider.
Inside the report
What a Chief QoE actually contains.
Selected pages from an illustrative report built on the fictional Harbor Manufacturing example. Not a real client or transaction.
Quality of Earnings · Sample analysis
1 / 26
Chief
Illustrative example
Quality of Earnings report
Harbor Manufacturing Co.
Harbor Manufacturing Co.
- Prepared for
- SBA acquisition lender
- Review periods
- FY 2023 to FY 2025 and TTM
- Transaction
- Initial acquisition, change of ownership
- Status
- Illustrative example
- Report ID
- ···
Prepared by
Chief
Illustrative example for demonstration purposes only. Harbor Manufacturing is fictional and not a Chief client. No figures here describe a real transaction.
Cover
Page 1
Section 1
Transmittal Letter and Independence
To the credit officer: this report presents our Quality of Earnings analysis of Harbor Manufacturing Co., a fictional metal fabricator, in connection with a proposed acquisition financed in part by an SBA 7(a) loan.
Our work tested whether the earnings the seller reports are supportable, recurring and transferable to a new owner. We reconciled the financials to tax returns and bank activity, tested each adjustment against evidence, and isolated owner and related-party items. We did not audit or review the financial statements.
Independence
| Statement | Confirmed |
|---|---|
| No financial interest in the business, buyer or seller | Yes |
| Fee not contingent on the result or on loan approval | Yes |
| No prior services to the seller within three years | Yes |
| No relationship with the lender beyond this engagement | Yes |
| Findings are the preparer's own, not management's | Yes |
This report is built to meet applicable SBA acquisition lending documentation expectations and is intended for the engaging lender only.
| Signed | Role | Date |
|---|---|---|
| ··· | Preparer, Chief | Illustrative |
| ··· | Reviewing principal | Illustrative |
Transmittal letter
Page 2
Section 1, cont.
Table of Contents
Table of contents
Page 3
Section 2
Key Findings
Five findings matter most to the credit decision. Each is paired with the evidence behind it and the lender implication.
| # | Finding | Evidence | Lender implication |
|---|---|---|---|
| 1 | Normalized EBITDA is $811K against $615K reported | Ledger, payroll, invoices | Earnings base for coverage |
| 2 | $49K of proposed adjustments not supported | Bank statements, GL | Do not credit the $245K |
| 3 | Top five customers hold 39% of revenue | Sales ledger | Monitor Customer A at 12.4% |
| 4 | Deposits reconcile to revenue within 0.1% | Bank statements | Revenue is real and collected |
| 5 | Margin fell 150 bps over the periods | P&L by year | Stress coverage at lower margin |
Bridge at a glance
| $ in thousands | TTM |
|---|---|
| Reported EBITDA | 615 |
| Management proposed adjustments | +245 |
| Chief supported adjustments | +196 |
| Normalized EBITDA | 811 |
Key findings
Page 4
Section 3.1
Business Overview
Harbor Manufacturing Co. is a fictional custom metal fabrication shop founded in 2004, serving industrial equipment makers, construction suppliers and distributors. It operates from a leased 48,000 square foot facility with 52 full-time employees.
Transaction context
- •Buyer is an experienced operator acquiring 100% of the assets.
- •The seller will remain for a six-month transition.
- •Closing is subject to SBA loan approval and a market-rate lease.
- •A letter of intent was signed at $5.1M.
Business overview
Page 5
Section 3.2
Transaction Overview and SBA Applicability
Table 1: Transaction summary
| Item | Detail |
|---|---|
| Transaction type | Initial acquisition, change of ownership |
| Purchase price | $5.1M |
| Senior loan | $3.6M, SBA 7(a) |
| Seller note | $580K, standby |
| Buyer equity | $920K |
| Intended beneficiary | Lender of record |
Table 2: Applicability test
| Test | Result |
|---|---|
| SBA threshold | $3,000,000, tested before buyer equity or seller debt |
| Result | $5.1M meets or exceeds the threshold |
| QoE required | Yes, purchase meets the threshold |
| Reference | SOP 50 10 8.1 |
The report is built to meet applicable SBA requirements for a Quality of Earnings analysis. Final eligibility and the credit decision remain with the lender and SBA.
Transaction and SBA applicability
Page 6
Section 3.3 to 3.4
Scope, Procedures and Basis of Presentation
Procedures performed
- •Financial reconciliation to tax returns
- •Reported to adjusted EBITDA bridge
- •Cash proof from bank statements
- •Revenue and customer concentration review
- •Owner and related-party testing
- •Management interviews
- •Source document review
Procedures not performed
- •Audit or review of financials
- •Legal and regulatory diligence
- •Environmental and tax structuring
- •Fixed asset appraisal
- •Customer calls
- •Site inspection
- •Forward-looking forecast
Basis of presentation
Periods covered are FY 2023, FY 2024, FY 2025 and TTM. Figures are drawn from tax returns, financial statements, the general ledger and bank statements. Items outside the evidence provided are marked as open items in Appendix D.
| Item | Convention |
|---|---|
| Currency | US dollars |
| Units | $ in thousands unless stated |
| Basis | Accrual, tax-basis books |
| Fiscal year end | December 31 |
| Rounding | Totals may differ by $1K |
Scope and procedures
Page 7
Section 3.5
Quality of Earnings Summary
Reported EBITDA is reconciled to normalized EBITDA in one headline bridge. Management's proposed adjustments are shown separately from Chief's independently supported adjustments.
| $ in thousands | Proposed | Supported | Status |
|---|---|---|---|
| Owner compensation | +120 | +120 | Supported |
| One-time legal expense | +45 | +45 | Supported |
| Related-party rent | +35 | +35 | Supported |
| Non-recurring revenue | −22 | −22 | Supported |
| Vehicle and personal | +36 | +18 | Partial |
| Growth investment | +31 | 0 | Excluded |
| Total adjustments | +245 | +196 |
Reported EBITDA
$615K
Supported adjustments
+$196K
Normalized EBITDA
$811K
Of the six proposed adjustments, four are supported in full, one in part and one is excluded. Normalized EBITDA is 32% above reported.
QoE summary
Page 8
Section 3.6 to 3.7
Cash Proof and Revenue Quality Summary
3.6 Cash proof
- •Deposits and disbursements agree to books and tax returns within tolerance.
- •Variance of $12K on $9.35M expected deposits is 0.1%.
- •Tolerance applied is 0.5%.
- •No unexplained transfers were found.
3.7 Revenue quality
- •Top five customers represent 39% of TTM revenue.
- •One customer exceeds the 10% threshold.
- •About two thirds of revenue repeats yearly.
- •Seasonality peaks in the third quarter.
| Test | Result | Conclusion |
|---|---|---|
| Deposits to revenue | 0.1% variance | Within tolerance |
| Revenue to tax return | Agrees | Reconciled |
| Concentration above 10% | 1 customer | Flagged |
| Non-recurring revenue | $22K removed | Adjusted |
Figure 1: Customer share of TTM revenue
Cash proof and revenue summary
Page 9
Section 3.8
Other Diligence Considerations
Matters unresolved at issuance, and material limits on scope or data, are listed so the lender can decide how to treat them.
| Item | Description | Effect | Owner |
|---|---|---|---|
| Open | Fixed asset register not supplied | None on EBITDA | Seller |
| Open | Year-end inventory count not supplied | None on EBITDA | Seller |
| Limit | No customer contracts reviewed beyond top five | Concentration risk | Lender |
| Limit | No sales tax nexus review | Possible liability | Buyer counsel |
| Note | Related-party lease to be reset at close | Rent adjustment | Buyer |
How to use this page
Items marked Open are expected to close before funding. Items marked Limit are outside the scope of this engagement and are noted for the lender's file.
Other diligence considerations
Page 10
Section 4
Financial Reconciliation
Accountant financials, internal books and tax returns are tied out side by side. Every variance is explained in one line: amount, cause and resolution.
| $ in thousands | Accountant | Books | Tax return | Variance |
|---|---|---|---|---|
| FY 2023 revenue | 7,420 | 7,420 | 7,420 | 0 |
| FY 2024 revenue | 8,100 | 8,100 | 8,100 | 0 |
| FY 2025 revenue | 8,900 | 8,898 | 8,900 | (2) |
| FY 2023 net income | 380 | 380 | 377 | (3) |
| FY 2024 net income | 362 | 362 | 362 | 0 |
| FY 2025 net income | 331 | 331 | 331 | 0 |
| Variance | Amount | Cause | Resolution |
|---|---|---|---|
| FY 2025 books revenue | ($2K) | Late credit memo | Booked in January |
| FY 2023 tax net income | ($3K) | Meals limitation | Tax-only difference |
All variances are under $5K and are explained. Tax returns were used as the anchor for annual totals.
Financial reconciliation
Page 11
Section 5
Quality of Earnings: Reported to Adjusted Bridge
Figure 2: TTM reported to normalized EBITDA, $K
Table 3: Quality of earnings analysis
| $ in thousands | FY 2023 | FY 2024 | FY 2025 | TTM |
|---|---|---|---|---|
| Reported EBITDA | 708 | 688 | 652 | 615 |
| Owner compensation to market | 105 | 110 | 115 | 120 |
| One-time legal expense | – | – | 45 | 45 |
| Related-party rent to market | 20 | 25 | 30 | 35 |
| Non-recurring revenue | – | – | – | (22) |
| Vehicle and personal expenses | 14 | 16 | 17 | 18 |
| Total adjustments | 139 | 151 | 207 | 196 |
| Normalized EBITDA | 847 | 839 | 859 | 811 |
Reported to adjusted bridge
Page 12
Section 5, cont.
Quality of Earnings: Adjustment Detail
Each adjustment is keyed with a letter, tied to the bridge and supported by a paragraph.
| Key | Adjustment | TTM | Accounting basis | Economic rationale |
|---|---|---|---|---|
| A | Owner compensation | +120 | Payroll register | Seller pay $260K vs $140K replacement |
| B | One-time legal | +45 | Invoices, settlement | Closed dispute, no recurrence |
| C | Related-party rent | +35 | Lease, market study | $225K paid vs $190K market |
| D | Non-recurring revenue | −22 | Sales ledger | One-time equipment resale |
| E | Vehicle and personal | +18 | Bank, GL | Family vehicle costs only |
A. Owner compensation
The seller drew $260K in wages and bonus. A replacement general manager with comparable duties costs $140K including taxes, based on a regional compensation survey. The $120K difference is added back because the buyer will pay a market-rate manager.
C. Related-party rent
Harbor leases its facility from an entity the seller owns. A market comparison supports $190K. The buyer signs a market-rate lease at close, so the $35K excess is removed.
Adjustment detail
Page 13
Section 5, cont.
Independent Challenge of Management Adjustments
Each adjustment proposed by management or the broker was tested individually and marked accepted, rejected or partial.
| Adjustment | Proposed | Supported | Disposition | Reason |
|---|---|---|---|---|
| Owner compensation | +120 | +120 | Accepted | Payroll and survey agree |
| One-time legal | +45 | +45 | Accepted | Settlement closed |
| Related-party rent | +35 | +35 | Accepted | Market study supports |
| Non-recurring revenue | −22 | −22 | Accepted | Identified in the ledger |
| Vehicle and personal | +36 | +18 | Partial | Work truck stays in expense |
| Growth investment | +31 | 0 | Rejected | Recurs every period |
| Total | +245 | +196 | $49K not supported |
The $31K growth investment item was described by management as non-recurring. Trade-show and marketing spend of $82K, $91K and $98K across the last three periods shows it recurs.
Independent challenge of management adjustments
Page 14
Section 6
Cash Proof
Operating deposits were reconstructed from bank statements and reconciled separately to the income statement and to the tax return.
Table 4: Revenue to bank deposits, TTM, $K
| Line | Amount | Source category |
|---|---|---|
| Reported revenue | 9,400 | P&L |
| Less increase in receivables | (80) | Balance sheet |
| Plus increase in customer deposits | 30 | Balance sheet |
| Less other reconciling items | 0 | General ledger |
| Expected deposits | 9,350 |
Table 5: Result
| Item | Amount |
|---|---|
| Operating deposits per bank | 9,338 |
| Expected deposits | 9,350 |
| Unexplained difference | (12) |
| Difference as % of revenue | 0.1% |
| Tolerance applied | 0.5% |
The unexplained difference is well within tolerance. Transfers between accounts and loan proceeds were excluded from operating deposits.
Cash proof
Page 15
Section 7
Revenue Quality and Customer Concentration
Table 6: Customer concentration, TTM
| Customer | Revenue $K | Share | Threshold |
|---|---|---|---|
| Customer A | 1,166 | 12.4% | Above 10% |
| Customer B | 855 | 9.1% | Below |
| Customer C | 677 | 7.2% | Below |
| Customer D | 526 | 5.6% | Below |
| Customer E | 442 | 4.7% | Below |
| Customer F | 367 | 3.9% | Below |
| Customer G | 320 | 3.4% | Below |
| Customer H | 282 | 3.0% | Below |
| Customer I | 254 | 2.7% | Below |
| Customer J | 226 | 2.4% | Below |
| Top 10 | 5,114 | 54.4% |
Top five customers hold 39.0% of revenue. Customer A is the only account above the 10% threshold and is assessed for churn and contract continuity.
Revenue and concentration
Page 16
Section 7, cont.
Revenue Quality: Mix and Seasonality
Figure 3: Monthly revenue, TTM, $K
| Segment | Share | Recurring | Gross margin |
|---|---|---|---|
| Sheet metal fabrication | 46% | Mostly | 29.5% |
| Structural and plate | 28% | Project | 26.5% |
| Welded assemblies | 18% | Mostly | 28.0% |
| Finishing and coating | 8% | Mostly | 31.0% |
- •Third quarter is 26% of revenue against 24% in the first quarter.
- •Revenue by customer tenure: 68% from customers served three or more years.
- •Project work is concentrated in structural and plate.
Revenue mix and seasonality
Page 17
Section 8
Owner and Related-Party Analysis
| Item | Recorded | Market | Add-back | Benchmark |
|---|---|---|---|---|
| Owner compensation | 260 | 140 | 120 | Regional survey |
| Spouse payroll | 0 | 0 | 0 | None recorded |
| Related-party rent | 225 | 190 | 35 | Market study |
| Vehicle, family use | 36 | 18 | 18 | Bank statements |
| Owner health insurance | 14 | 14 | 0 | Retained as cost |
| Total | 173 |
Spouse and family payroll was tested and none was found. Owner health insurance stays in expense because the buyer will provide equivalent benefits.
Owner and related-party analysis
Page 18
Section 9
Lender Considerations: Debt Service Coverage
| $ in thousands | Reported | Adjusted |
|---|---|---|
| EBITDA | 615 | 811 |
| Annual debt service | 605 | 605 |
| DSCR | 1.02x | 1.34x |
Debt service build
| Instrument | Terms | Annual |
|---|---|---|
| SBA 7(a), $3.6M | 10.25%, 10 years | 593 |
| Seller note, $580K | 2%, standby | 12 |
| Total | 605 |
Figure 4: DSCR against the 1.25x minimum
Coverage on reported earnings is thin at 1.02x. Coverage on normalized earnings is 1.34x. A 10% earnings decline would fall below the lender's 1.25x minimum.
Debt service coverage
Page 19
Appendix A
Detailed QoE Adjustment Schedule
| $K | Jan | Feb | Mar | Apr | May | Jun |
|---|---|---|---|---|---|---|
| Owner compensation | 10 | 10 | 10 | 10 | 10 | 10 |
| One-time legal | 0 | 0 | 45 | 0 | 0 | 0 |
| Related-party rent | 3 | 3 | 3 | 3 | 3 | 3 |
| Non-recurring revenue | 0 | 0 | 0 | (22) | 0 | 0 |
| Vehicle and personal | 1 | 2 | 1 | 2 | 1 | 2 |
| Total | 14 | 15 | 59 | (7) | 14 | 15 |
| $K | Jul | Aug | Sep | Oct | Nov | Dec |
|---|---|---|---|---|---|---|
| Owner compensation | 10 | 10 | 10 | 10 | 10 | 10 |
| One-time legal | 0 | 0 | 0 | 0 | 0 | 0 |
| Related-party rent | 3 | 3 | 3 | 2 | 3 | 3 |
| Non-recurring revenue | 0 | 0 | 0 | 0 | 0 | 0 |
| Vehicle and personal | 2 | 1 | 2 | 2 | 1 | 2 |
| Total | 15 | 14 | 15 | 14 | 14 | 15 |
Appendix A, adjustment schedule
Page 20
Appendix A, detail
Source Trace: Vehicle and Personal Expenses
Management proposed
+$36K
Chief supported
+$18K
Conclusion
Partial
Documents reviewed
| Document | Period | Use |
|---|---|---|
| Bank statements | 12 months | Matched to ledger entries |
| General ledger, vehicle accounts | TTM | Identified candidate charges |
| Management explanation | Provided | Reference only, not support |
Line-level trace
| Ledger entry | Match | Class | Amount |
|---|---|---|---|
| Vehicle lease, family vehicle | Matched | Personal, add back | 10 |
| Vehicle insurance, family | Matched | Personal, add back | 4 |
| Fuel and maintenance, work truck | Matched | Operating, keep | 12 |
| Registration, work truck | Matched | Operating, keep | 4 |
| Fuel, family vehicle | Matched | Personal, add back | 4 |
| Unmatched charges | Not found | Excluded | 2 |
| Supported add-back | 18 |
Appendix A, source trace
Page 21
Appendix B
Monthly P&L: Revenue to EBITDA
| $K | Revenue | Gross profit | Opex ex D&A | EBITDA | Margin |
|---|---|---|---|---|---|
| Jan | 677 | 189 | 151 | 38 | 5.6% |
| Feb | 696 | 195 | 154 | 41 | 5.9% |
| Mar | 752 | 210 | 164 | 46 | 6.1% |
| Apr | 771 | 216 | 168 | 48 | 6.2% |
| May | 799 | 224 | 173 | 51 | 6.4% |
| Jun | 837 | 234 | 177 | 57 | 6.8% |
| Jul | 827 | 231 | 173 | 58 | 7.0% |
| Aug | 846 | 237 | 179 | 58 | 6.9% |
| Sep | 818 | 229 | 174 | 55 | 6.7% |
| Oct | 799 | 224 | 170 | 54 | 6.8% |
| Nov | 818 | 229 | 172 | 57 | 7.0% |
| Dec | 760 | 213 | 161 | 52 | 6.8% |
| TTM | 9,400 | 2,631 | 615 | 6.5% |
Appendix B, monthly P&L
Page 22
Appendix B, cont.
Monthly Quality of Earnings Walk
| $K | Reported EBITDA | Adjustments | Normalized | Cumulative |
|---|---|---|---|---|
| Jan | 38 | 14 | 52 | 52 |
| Feb | 41 | 15 | 56 | 108 |
| Mar | 46 | 59 | 105 | 213 |
| Apr | 48 | (7) | 41 | 254 |
| May | 51 | 14 | 65 | 319 |
| Jun | 57 | 15 | 72 | 391 |
| Jul | 58 | 15 | 73 | 464 |
| Aug | 58 | 14 | 72 | 536 |
| Sep | 55 | 15 | 70 | 606 |
| Oct | 54 | 14 | 68 | 674 |
| Nov | 57 | 14 | 71 | 745 |
| Dec | 52 | 14 | 66 | 811 |
| TTM | 615 | 196 | 811 |
Figure 5: Monthly normalized EBITDA, $K
Appendix B, monthly QoE
Page 23
Appendix C
Cash Proof Detail by Month
| $K | Revenue | Δ AR | Δ Deposits | Expected | Bank | Diff |
|---|---|---|---|---|---|---|
| Jan | 677 | (5) | 2 | 674 | 675 | 1 |
| Feb | 696 | (8) | 3 | 691 | 689 | (2) |
| Mar | 752 | (6) | 2 | 748 | 748 | 0 |
| Apr | 771 | (9) | 3 | 765 | 764 | (1) |
| May | 799 | (7) | 2 | 794 | 796 | 2 |
| Jun | 837 | (8) | 3 | 832 | 831 | (1) |
| Jul | 827 | (6) | 3 | 824 | 824 | 0 |
| Aug | 846 | (7) | 2 | 841 | 842 | 1 |
| Sep | 818 | (6) | 3 | 815 | 813 | (2) |
| Oct | 799 | (8) | 2 | 793 | 793 | 0 |
| Nov | 818 | (5) | 2 | 815 | 814 | (1) |
| Dec | 760 | (5) | 3 | 758 | 749 | (9) |
The monthly differences net to $12K under expected deposits across the year, matching the Section 6 conclusion.
Appendix C, proof of cash detail
Page 24
Appendix C, cont.
Customer Concentration and Tax Reconciliation Detail
Concentration trend, Top 5 share of revenue
| Customer | FY 2023 | FY 2024 | FY 2025 | TTM |
|---|---|---|---|---|
| Customer A | 10.8% | 11.5% | 12.0% | 12.4% |
| Customer B | 8.9% | 9.0% | 9.2% | 9.1% |
| Customer C | 6.8% | 7.0% | 7.1% | 7.2% |
| Customer D | 5.9% | 5.8% | 5.7% | 5.6% |
| Customer E | 4.5% | 4.6% | 4.7% | 4.7% |
| Top 5 | 36.9% | 37.9% | 38.7% | 39.0% |
Tax return reconciliation, $K
| Line | Return | Books | Difference |
|---|---|---|---|
| FY 2025 gross receipts | 8,900 | 8,898 | (2) |
| FY 2025 ordinary income | 331 | 331 | 0 |
| FY 2024 gross receipts | 8,100 | 8,100 | 0 |
| FY 2024 ordinary income | 362 | 362 | 0 |
Concentration has risen about two points in three years. The increase is driven by Customer A.
Appendix C, concentration and tax
Page 25
Appendix D
Source Documents, Open Items and Glossary
| Document | Period | Status |
|---|---|---|
| Accountant financials | FY 2023 to FY 2025 | Received |
| Tax returns | FY 2023 to FY 2025 | Received |
| Bank statements | TTM | Received |
| General ledger | TTM | Received |
| Payroll registers | TTM | Received |
| Facility lease | Current | Received |
| Fixed asset register | FY 2025 | Open |
| Inventory count | Year end | Open |
Glossary
| Term | Meaning |
|---|---|
| Normalized EBITDA | EBITDA after supported adjustments. |
| Proof of cash | Reconciliation of revenue to bank deposits. |
| Concentration | Share of revenue from the largest customers. |
| DSCR | Cash flow divided by annual debt service. |
Appendix D, sources and open items
Page 26
Swipe, scroll, or use the arrows to turn pages.
The $15K QoE + Detailed FDD goes further than the SBA minimum, adding schedules like these.
QoE + Detailed FDD · Sample analysis
1 / 35
Chief
Illustrative example
Quality of Earnings report
Harbor Manufacturing Co.
Harbor Manufacturing Co.
- Prepared for
- SBA acquisition lender
- Review periods
- FY 2023 to FY 2025 and TTM
- Transaction
- Initial acquisition, change of ownership
- Status
- Illustrative example
- Report ID
- ···
Prepared by
Chief
Illustrative example for demonstration purposes only. Harbor Manufacturing is fictional and not a Chief client. No figures here describe a real transaction.
Cover
Page 1
Section 1
Transmittal Letter and Independence
To the credit officer: this report presents our Quality of Earnings analysis of Harbor Manufacturing Co., a fictional metal fabricator, in connection with a proposed acquisition financed in part by an SBA 7(a) loan.
Our work tested whether the earnings the seller reports are supportable, recurring and transferable to a new owner. We reconciled the financials to tax returns and bank activity, tested each adjustment against evidence, and isolated owner and related-party items. We did not audit or review the financial statements.
Independence
| Statement | Confirmed |
|---|---|
| No financial interest in the business, buyer or seller | Yes |
| Fee not contingent on the result or on loan approval | Yes |
| No prior services to the seller within three years | Yes |
| No relationship with the lender beyond this engagement | Yes |
| Findings are the preparer's own, not management's | Yes |
This report is built to meet applicable SBA acquisition lending documentation expectations and is intended for the engaging lender only.
| Signed | Role | Date |
|---|---|---|
| ··· | Preparer, Chief | Illustrative |
| ··· | Reviewing principal | Illustrative |
Transmittal letter
Page 2
Section 1, cont.
Table of Contents
Table of contents
Page 3
Section 2
Key Findings
Five findings matter most to the credit decision. Each is paired with the evidence behind it and the lender implication.
| # | Finding | Evidence | Lender implication |
|---|---|---|---|
| 1 | Normalized EBITDA is $811K against $615K reported | Ledger, payroll, invoices | Earnings base for coverage |
| 2 | $49K of proposed adjustments not supported | Bank statements, GL | Do not credit the $245K |
| 3 | Top five customers hold 39% of revenue | Sales ledger | Monitor Customer A at 12.4% |
| 4 | Deposits reconcile to revenue within 0.1% | Bank statements | Revenue is real and collected |
| 5 | Margin fell 150 bps over the periods | P&L by year | Stress coverage at lower margin |
Bridge at a glance
| $ in thousands | TTM |
|---|---|
| Reported EBITDA | 615 |
| Management proposed adjustments | +245 |
| Chief supported adjustments | +196 |
| Normalized EBITDA | 811 |
Key findings
Page 4
Section 3.1
Business Overview
Harbor Manufacturing Co. is a fictional custom metal fabrication shop founded in 2004, serving industrial equipment makers, construction suppliers and distributors. It operates from a leased 48,000 square foot facility with 52 full-time employees.
Transaction context
- •Buyer is an experienced operator acquiring 100% of the assets.
- •The seller will remain for a six-month transition.
- •Closing is subject to SBA loan approval and a market-rate lease.
- •A letter of intent was signed at $5.1M.
Business overview
Page 5
Section 3.2
Transaction Overview and SBA Applicability
Table 1: Transaction summary
| Item | Detail |
|---|---|
| Transaction type | Initial acquisition, change of ownership |
| Purchase price | $5.1M |
| Senior loan | $3.6M, SBA 7(a) |
| Seller note | $580K, standby |
| Buyer equity | $920K |
| Intended beneficiary | Lender of record |
Table 2: Applicability test
| Test | Result |
|---|---|
| SBA threshold | $3,000,000, tested before buyer equity or seller debt |
| Result | $5.1M meets or exceeds the threshold |
| QoE required | Yes, purchase meets the threshold |
| Reference | SOP 50 10 8.1 |
The report is built to meet applicable SBA requirements for a Quality of Earnings analysis. Final eligibility and the credit decision remain with the lender and SBA.
Transaction and SBA applicability
Page 6
Section 3.3 to 3.4
Scope, Procedures and Basis of Presentation
Procedures performed
- •Financial reconciliation to tax returns
- •Reported to adjusted EBITDA bridge
- •Cash proof from bank statements
- •Revenue and customer concentration review
- •Owner and related-party testing
- •Management interviews
- •Source document review
Procedures not performed
- •Audit or review of financials
- •Legal and regulatory diligence
- •Environmental and tax structuring
- •Fixed asset appraisal
- •Customer calls
- •Site inspection
- •Forward-looking forecast
Basis of presentation
Periods covered are FY 2023, FY 2024, FY 2025 and TTM. Figures are drawn from tax returns, financial statements, the general ledger and bank statements. Items outside the evidence provided are marked as open items in Appendix D.
| Item | Convention |
|---|---|
| Currency | US dollars |
| Units | $ in thousands unless stated |
| Basis | Accrual, tax-basis books |
| Fiscal year end | December 31 |
| Rounding | Totals may differ by $1K |
Scope and procedures
Page 7
Section 3.5
Quality of Earnings Summary
Reported EBITDA is reconciled to normalized EBITDA in one headline bridge. Management's proposed adjustments are shown separately from Chief's independently supported adjustments.
| $ in thousands | Proposed | Supported | Status |
|---|---|---|---|
| Owner compensation | +120 | +120 | Supported |
| One-time legal expense | +45 | +45 | Supported |
| Related-party rent | +35 | +35 | Supported |
| Non-recurring revenue | −22 | −22 | Supported |
| Vehicle and personal | +36 | +18 | Partial |
| Growth investment | +31 | 0 | Excluded |
| Total adjustments | +245 | +196 |
Reported EBITDA
$615K
Supported adjustments
+$196K
Normalized EBITDA
$811K
Of the six proposed adjustments, four are supported in full, one in part and one is excluded. Normalized EBITDA is 32% above reported.
QoE summary
Page 8
Section 3.6 to 3.7
Cash Proof and Revenue Quality Summary
3.6 Cash proof
- •Deposits and disbursements agree to books and tax returns within tolerance.
- •Variance of $12K on $9.35M expected deposits is 0.1%.
- •Tolerance applied is 0.5%.
- •No unexplained transfers were found.
3.7 Revenue quality
- •Top five customers represent 39% of TTM revenue.
- •One customer exceeds the 10% threshold.
- •About two thirds of revenue repeats yearly.
- •Seasonality peaks in the third quarter.
| Test | Result | Conclusion |
|---|---|---|
| Deposits to revenue | 0.1% variance | Within tolerance |
| Revenue to tax return | Agrees | Reconciled |
| Concentration above 10% | 1 customer | Flagged |
| Non-recurring revenue | $22K removed | Adjusted |
Figure 1: Customer share of TTM revenue
Cash proof and revenue summary
Page 9
Section 3.8
Other Diligence Considerations
Matters unresolved at issuance, and material limits on scope or data, are listed so the lender can decide how to treat them.
| Item | Description | Effect | Owner |
|---|---|---|---|
| Open | Fixed asset register not supplied | None on EBITDA | Seller |
| Open | Year-end inventory count not supplied | None on EBITDA | Seller |
| Limit | No customer contracts reviewed beyond top five | Concentration risk | Lender |
| Limit | No sales tax nexus review | Possible liability | Buyer counsel |
| Note | Related-party lease to be reset at close | Rent adjustment | Buyer |
How to use this page
Items marked Open are expected to close before funding. Items marked Limit are outside the scope of this engagement and are noted for the lender's file.
Other diligence considerations
Page 10
Section 4
Financial Reconciliation
Accountant financials, internal books and tax returns are tied out side by side. Every variance is explained in one line: amount, cause and resolution.
| $ in thousands | Accountant | Books | Tax return | Variance |
|---|---|---|---|---|
| FY 2023 revenue | 7,420 | 7,420 | 7,420 | 0 |
| FY 2024 revenue | 8,100 | 8,100 | 8,100 | 0 |
| FY 2025 revenue | 8,900 | 8,898 | 8,900 | (2) |
| FY 2023 net income | 380 | 380 | 377 | (3) |
| FY 2024 net income | 362 | 362 | 362 | 0 |
| FY 2025 net income | 331 | 331 | 331 | 0 |
| Variance | Amount | Cause | Resolution |
|---|---|---|---|
| FY 2025 books revenue | ($2K) | Late credit memo | Booked in January |
| FY 2023 tax net income | ($3K) | Meals limitation | Tax-only difference |
All variances are under $5K and are explained. Tax returns were used as the anchor for annual totals.
Financial reconciliation
Page 11
Section 5
Quality of Earnings: Reported to Adjusted Bridge
Figure 2: TTM reported to normalized EBITDA, $K
Table 3: Quality of earnings analysis
| $ in thousands | FY 2023 | FY 2024 | FY 2025 | TTM |
|---|---|---|---|---|
| Reported EBITDA | 708 | 688 | 652 | 615 |
| Owner compensation to market | 105 | 110 | 115 | 120 |
| One-time legal expense | – | – | 45 | 45 |
| Related-party rent to market | 20 | 25 | 30 | 35 |
| Non-recurring revenue | – | – | – | (22) |
| Vehicle and personal expenses | 14 | 16 | 17 | 18 |
| Total adjustments | 139 | 151 | 207 | 196 |
| Normalized EBITDA | 847 | 839 | 859 | 811 |
Reported to adjusted bridge
Page 12
Section 5, cont.
Quality of Earnings: Adjustment Detail
Each adjustment is keyed with a letter, tied to the bridge and supported by a paragraph.
| Key | Adjustment | TTM | Accounting basis | Economic rationale |
|---|---|---|---|---|
| A | Owner compensation | +120 | Payroll register | Seller pay $260K vs $140K replacement |
| B | One-time legal | +45 | Invoices, settlement | Closed dispute, no recurrence |
| C | Related-party rent | +35 | Lease, market study | $225K paid vs $190K market |
| D | Non-recurring revenue | −22 | Sales ledger | One-time equipment resale |
| E | Vehicle and personal | +18 | Bank, GL | Family vehicle costs only |
A. Owner compensation
The seller drew $260K in wages and bonus. A replacement general manager with comparable duties costs $140K including taxes, based on a regional compensation survey. The $120K difference is added back because the buyer will pay a market-rate manager.
C. Related-party rent
Harbor leases its facility from an entity the seller owns. A market comparison supports $190K. The buyer signs a market-rate lease at close, so the $35K excess is removed.
Adjustment detail
Page 13
Section 5, cont.
Independent Challenge of Management Adjustments
Each adjustment proposed by management or the broker was tested individually and marked accepted, rejected or partial.
| Adjustment | Proposed | Supported | Disposition | Reason |
|---|---|---|---|---|
| Owner compensation | +120 | +120 | Accepted | Payroll and survey agree |
| One-time legal | +45 | +45 | Accepted | Settlement closed |
| Related-party rent | +35 | +35 | Accepted | Market study supports |
| Non-recurring revenue | −22 | −22 | Accepted | Identified in the ledger |
| Vehicle and personal | +36 | +18 | Partial | Work truck stays in expense |
| Growth investment | +31 | 0 | Rejected | Recurs every period |
| Total | +245 | +196 | $49K not supported |
The $31K growth investment item was described by management as non-recurring. Trade-show and marketing spend of $82K, $91K and $98K across the last three periods shows it recurs.
Independent challenge of management adjustments
Page 14
Section 6
Cash Proof
Operating deposits were reconstructed from bank statements and reconciled separately to the income statement and to the tax return.
Table 4: Revenue to bank deposits, TTM, $K
| Line | Amount | Source category |
|---|---|---|
| Reported revenue | 9,400 | P&L |
| Less increase in receivables | (80) | Balance sheet |
| Plus increase in customer deposits | 30 | Balance sheet |
| Less other reconciling items | 0 | General ledger |
| Expected deposits | 9,350 |
Table 5: Result
| Item | Amount |
|---|---|
| Operating deposits per bank | 9,338 |
| Expected deposits | 9,350 |
| Unexplained difference | (12) |
| Difference as % of revenue | 0.1% |
| Tolerance applied | 0.5% |
The unexplained difference is well within tolerance. Transfers between accounts and loan proceeds were excluded from operating deposits.
Cash proof
Page 15
Section 7
Revenue Quality and Customer Concentration
Table 6: Customer concentration, TTM
| Customer | Revenue $K | Share | Threshold |
|---|---|---|---|
| Customer A | 1,166 | 12.4% | Above 10% |
| Customer B | 855 | 9.1% | Below |
| Customer C | 677 | 7.2% | Below |
| Customer D | 526 | 5.6% | Below |
| Customer E | 442 | 4.7% | Below |
| Customer F | 367 | 3.9% | Below |
| Customer G | 320 | 3.4% | Below |
| Customer H | 282 | 3.0% | Below |
| Customer I | 254 | 2.7% | Below |
| Customer J | 226 | 2.4% | Below |
| Top 10 | 5,114 | 54.4% |
Top five customers hold 39.0% of revenue. Customer A is the only account above the 10% threshold and is assessed for churn and contract continuity.
Revenue and concentration
Page 16
Section 7, cont.
Revenue Quality: Mix and Seasonality
Figure 3: Monthly revenue, TTM, $K
| Segment | Share | Recurring | Gross margin |
|---|---|---|---|
| Sheet metal fabrication | 46% | Mostly | 29.5% |
| Structural and plate | 28% | Project | 26.5% |
| Welded assemblies | 18% | Mostly | 28.0% |
| Finishing and coating | 8% | Mostly | 31.0% |
- •Third quarter is 26% of revenue against 24% in the first quarter.
- •Revenue by customer tenure: 68% from customers served three or more years.
- •Project work is concentrated in structural and plate.
Revenue mix and seasonality
Page 17
Section 8
Owner and Related-Party Analysis
| Item | Recorded | Market | Add-back | Benchmark |
|---|---|---|---|---|
| Owner compensation | 260 | 140 | 120 | Regional survey |
| Spouse payroll | 0 | 0 | 0 | None recorded |
| Related-party rent | 225 | 190 | 35 | Market study |
| Vehicle, family use | 36 | 18 | 18 | Bank statements |
| Owner health insurance | 14 | 14 | 0 | Retained as cost |
| Total | 173 |
Spouse and family payroll was tested and none was found. Owner health insurance stays in expense because the buyer will provide equivalent benefits.
Owner and related-party analysis
Page 18
Section 9
Lender Considerations: Debt Service Coverage
| $ in thousands | Reported | Adjusted |
|---|---|---|
| EBITDA | 615 | 811 |
| Annual debt service | 605 | 605 |
| DSCR | 1.02x | 1.34x |
Debt service build
| Instrument | Terms | Annual |
|---|---|---|
| SBA 7(a), $3.6M | 10.25%, 10 years | 593 |
| Seller note, $580K | 2%, standby | 12 |
| Total | 605 |
Figure 4: DSCR against the 1.25x minimum
Coverage on reported earnings is thin at 1.02x. Coverage on normalized earnings is 1.34x. A 10% earnings decline would fall below the lender's 1.25x minimum.
Debt service coverage
Page 19
Appendix A
Detailed QoE Adjustment Schedule
| $K | Jan | Feb | Mar | Apr | May | Jun |
|---|---|---|---|---|---|---|
| Owner compensation | 10 | 10 | 10 | 10 | 10 | 10 |
| One-time legal | 0 | 0 | 45 | 0 | 0 | 0 |
| Related-party rent | 3 | 3 | 3 | 3 | 3 | 3 |
| Non-recurring revenue | 0 | 0 | 0 | (22) | 0 | 0 |
| Vehicle and personal | 1 | 2 | 1 | 2 | 1 | 2 |
| Total | 14 | 15 | 59 | (7) | 14 | 15 |
| $K | Jul | Aug | Sep | Oct | Nov | Dec |
|---|---|---|---|---|---|---|
| Owner compensation | 10 | 10 | 10 | 10 | 10 | 10 |
| One-time legal | 0 | 0 | 0 | 0 | 0 | 0 |
| Related-party rent | 3 | 3 | 3 | 2 | 3 | 3 |
| Non-recurring revenue | 0 | 0 | 0 | 0 | 0 | 0 |
| Vehicle and personal | 2 | 1 | 2 | 2 | 1 | 2 |
| Total | 15 | 14 | 15 | 14 | 14 | 15 |
Appendix A, adjustment schedule
Page 20
Appendix A, detail
Source Trace: Vehicle and Personal Expenses
Management proposed
+$36K
Chief supported
+$18K
Conclusion
Partial
Documents reviewed
| Document | Period | Use |
|---|---|---|
| Bank statements | 12 months | Matched to ledger entries |
| General ledger, vehicle accounts | TTM | Identified candidate charges |
| Management explanation | Provided | Reference only, not support |
Line-level trace
| Ledger entry | Match | Class | Amount |
|---|---|---|---|
| Vehicle lease, family vehicle | Matched | Personal, add back | 10 |
| Vehicle insurance, family | Matched | Personal, add back | 4 |
| Fuel and maintenance, work truck | Matched | Operating, keep | 12 |
| Registration, work truck | Matched | Operating, keep | 4 |
| Fuel, family vehicle | Matched | Personal, add back | 4 |
| Unmatched charges | Not found | Excluded | 2 |
| Supported add-back | 18 |
Appendix A, source trace
Page 21
Appendix B
Monthly P&L: Revenue to EBITDA
| $K | Revenue | Gross profit | Opex ex D&A | EBITDA | Margin |
|---|---|---|---|---|---|
| Jan | 677 | 189 | 151 | 38 | 5.6% |
| Feb | 696 | 195 | 154 | 41 | 5.9% |
| Mar | 752 | 210 | 164 | 46 | 6.1% |
| Apr | 771 | 216 | 168 | 48 | 6.2% |
| May | 799 | 224 | 173 | 51 | 6.4% |
| Jun | 837 | 234 | 177 | 57 | 6.8% |
| Jul | 827 | 231 | 173 | 58 | 7.0% |
| Aug | 846 | 237 | 179 | 58 | 6.9% |
| Sep | 818 | 229 | 174 | 55 | 6.7% |
| Oct | 799 | 224 | 170 | 54 | 6.8% |
| Nov | 818 | 229 | 172 | 57 | 7.0% |
| Dec | 760 | 213 | 161 | 52 | 6.8% |
| TTM | 9,400 | 2,631 | 615 | 6.5% |
Appendix B, monthly P&L
Page 22
Appendix B, cont.
Monthly Quality of Earnings Walk
| $K | Reported EBITDA | Adjustments | Normalized | Cumulative |
|---|---|---|---|---|
| Jan | 38 | 14 | 52 | 52 |
| Feb | 41 | 15 | 56 | 108 |
| Mar | 46 | 59 | 105 | 213 |
| Apr | 48 | (7) | 41 | 254 |
| May | 51 | 14 | 65 | 319 |
| Jun | 57 | 15 | 72 | 391 |
| Jul | 58 | 15 | 73 | 464 |
| Aug | 58 | 14 | 72 | 536 |
| Sep | 55 | 15 | 70 | 606 |
| Oct | 54 | 14 | 68 | 674 |
| Nov | 57 | 14 | 71 | 745 |
| Dec | 52 | 14 | 66 | 811 |
| TTM | 615 | 196 | 811 |
Figure 5: Monthly normalized EBITDA, $K
Appendix B, monthly QoE
Page 23
Appendix C
Cash Proof Detail by Month
| $K | Revenue | Δ AR | Δ Deposits | Expected | Bank | Diff |
|---|---|---|---|---|---|---|
| Jan | 677 | (5) | 2 | 674 | 675 | 1 |
| Feb | 696 | (8) | 3 | 691 | 689 | (2) |
| Mar | 752 | (6) | 2 | 748 | 748 | 0 |
| Apr | 771 | (9) | 3 | 765 | 764 | (1) |
| May | 799 | (7) | 2 | 794 | 796 | 2 |
| Jun | 837 | (8) | 3 | 832 | 831 | (1) |
| Jul | 827 | (6) | 3 | 824 | 824 | 0 |
| Aug | 846 | (7) | 2 | 841 | 842 | 1 |
| Sep | 818 | (6) | 3 | 815 | 813 | (2) |
| Oct | 799 | (8) | 2 | 793 | 793 | 0 |
| Nov | 818 | (5) | 2 | 815 | 814 | (1) |
| Dec | 760 | (5) | 3 | 758 | 749 | (9) |
The monthly differences net to $12K under expected deposits across the year, matching the Section 6 conclusion.
Appendix C, proof of cash detail
Page 24
Appendix C, cont.
Customer Concentration and Tax Reconciliation Detail
Concentration trend, Top 5 share of revenue
| Customer | FY 2023 | FY 2024 | FY 2025 | TTM |
|---|---|---|---|---|
| Customer A | 10.8% | 11.5% | 12.0% | 12.4% |
| Customer B | 8.9% | 9.0% | 9.2% | 9.1% |
| Customer C | 6.8% | 7.0% | 7.1% | 7.2% |
| Customer D | 5.9% | 5.8% | 5.7% | 5.6% |
| Customer E | 4.5% | 4.6% | 4.7% | 4.7% |
| Top 5 | 36.9% | 37.9% | 38.7% | 39.0% |
Tax return reconciliation, $K
| Line | Return | Books | Difference |
|---|---|---|---|
| FY 2025 gross receipts | 8,900 | 8,898 | (2) |
| FY 2025 ordinary income | 331 | 331 | 0 |
| FY 2024 gross receipts | 8,100 | 8,100 | 0 |
| FY 2024 ordinary income | 362 | 362 | 0 |
Concentration has risen about two points in three years. The increase is driven by Customer A.
Appendix C, concentration and tax
Page 25
Appendix D
Source Documents, Open Items and Glossary
| Document | Period | Status |
|---|---|---|
| Accountant financials | FY 2023 to FY 2025 | Received |
| Tax returns | FY 2023 to FY 2025 | Received |
| Bank statements | TTM | Received |
| General ledger | TTM | Received |
| Payroll registers | TTM | Received |
| Facility lease | Current | Received |
| Fixed asset register | FY 2025 | Open |
| Inventory count | Year end | Open |
Glossary
| Term | Meaning |
|---|---|
| Normalized EBITDA | EBITDA after supported adjustments. |
| Proof of cash | Reconciliation of revenue to bank deposits. |
| Concentration | Share of revenue from the largest customers. |
| DSCR | Cash flow divided by annual debt service. |
Appendix D, sources and open items
Page 26
Sections 10 to 14
Detailed FDD / QoE Upgrade
The pages that follow are not part of the core SBA scope. They appear only in the Detailed FDD and QoE product, engaged separately when a client wants deeper support for working capital, debt-like items and operating analysis.
| Section | Topic | Output |
|---|---|---|
| 10 | Net working capital | Monthly schedule and peg |
| 11 | Net debt and debt-like items | Debt and cash-like schedule |
| 12 | Balance sheet diligence | Aging, inventory, accruals |
| 13 | Enhanced operating analysis | Monthly P&L, KPIs |
| 14 | Other transaction analysis | Forecast and budget tests |
FDD divider
Page 27
Section 10
Net Working Capital
Figure 6: Monthly net working capital, TTM, $K
Table 7: Quarter-end components, $K
| $K | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| Accounts receivable | 1,020 | 1,085 | 1,140 | 1,060 |
| Inventory | 1,310 | 1,380 | 1,450 | 1,340 |
| Other current assets | 96 | 98 | 102 | 99 |
| Accounts payable | (690) | (735) | (770) | (710) |
| Accrued liabilities | (210) | (220) | (230) | (215) |
| Net working capital | 1,526 | 1,608 | 1,692 | 1,574 |
Net working capital peaks in the third quarter as inventory and receivables build ahead of year-end shipments.
Net working capital
Page 28
Section 10, cont.
Net Working Capital Peg
Figure 7: Prior-year monthly NWC, $K
Table 8: Peg build
| Measure | $K |
|---|---|
| Average NWC, trailing 12 months | 1,600 |
| Average NWC, prior 12 months | 1,530 |
| Average NWC, trailing 24 months | 1,565 |
| One-time items removed | (38) |
| Seasonal peak, Q3 | 1,692 |
| Indicative peg | 1,600 |
The peg is set at the trailing-twelve-month average after removing one-time items. Seasonality means a closing in the third quarter would be above the peg and a closing in the first quarter below it.
Working capital peg
Page 29
Section 11
Net Debt, Debt-Like and Cash-Like Items
Table 9: Net debt schedule, $K
| Category | Item | Finding | Amount | Treatment |
|---|---|---|---|---|
| Debt | Equipment term loan | Funded debt | 810 | Paid at close |
| Debt | Revolving line of credit | Funded debt | 330 | Paid at close |
| Debt | Capital lease | Funded debt | 270 | Paid at close |
| Debt-like | Accrued bonuses | Earned, unpaid | 62 | Price adjustment |
| Debt-like | Unpaid vacation | Earned, unpaid | 38 | Price adjustment |
| Debt-like | Customer deposits | Obligation to deliver | 180 | Working capital |
| Related party | Seller entity rent | Accrued balance | 45 | Settled at close |
| Cash-like | Cash on hand | Operating | (410) | Seller keeps |
| Unrecorded | Sales tax exposure | Not quantified | ··· | Diligence item |
| Net debt and debt-like items | 1,325 |
Overlap is checked against net working capital and QoE adjustments so no item is counted twice in the price mechanism.
Net debt
Page 30
Section 12
Balance Sheet Diligence
Only the sub-areas relevant to this business appear. AR and AP aging, inventory and accruals were triggered by the transaction.
Table 10: Receivables aging at year end, $K
| Bucket | Amount | Share |
|---|---|---|
| Current | 742 | 70% |
| 1 to 30 days | 212 | 20% |
| 31 to 60 days | 74 | 7% |
| Over 60 days | 32 | 3% |
| Total | 1,060 | 100% |
Table 11: Inventory composition, $K
| Category | Amount | Share |
|---|---|---|
| Raw materials | 620 | 46% |
| Work in process | 410 | 31% |
| Finished goods | 230 | 17% |
| Reserve | (20) | −2% |
| Other | 100 | 8% |
| Total | 1,340 | 100% |
Balance sheet diligence
Page 31
Section 13
Enhanced Operating and Financial Analysis
Table 12: Operating KPIs
| KPI | FY 2024 | FY 2025 | TTM | Read |
|---|---|---|---|---|
| Shop utilization | 78% | 81% | 82% | Improving |
| Backlog, months | 2.4 | 2.7 | 2.9 | Healthy |
| Scrap rate | 2.6% | 2.4% | 2.3% | Improving |
| On-time delivery | 91% | 93% | 94% | Strong |
| Revenue per employee | $156K | $171K | $181K | Rising |
Table 13: Gross margin by line
| Line | FY 2024 | FY 2025 | TTM |
|---|---|---|---|
| Sheet metal | 31.0% | 30.0% | 29.5% |
| Structural and plate | 28.0% | 27.0% | 26.5% |
| Welded assemblies | 29.5% | 28.5% | 28.0% |
| Finishing | 32.0% | 31.5% | 31.0% |
Margin pressure is widespread across lines. Structural and plate work, the most material-intensive line, shows the steepest decline.
Operating analysis
Page 32
Section 14
Other Transaction-Specific Analysis
Table 14: Forecast versus actual
| $K | Budget | Actual | Variance |
|---|---|---|---|
| Revenue, FY 2025 | 9,100 | 8,900 | (200) |
| Gross profit, FY 2025 | 2,730 | 2,580 | (150) |
| EBITDA, FY 2025 | 720 | 652 | (68) |
| Revenue, TTM | 9,700 | 9,400 | (300) |
Management budgets overstated revenue by 2% to 3% and EBITDA by about 10%. The valuation therefore relies on TTM actuals rather than on the budget.
- •Budgets are prepared annually by the seller and not updated mid-year.
- •Variances are driven by material cost increases and timing of two projects.
- •A buyer forecast should start from TTM, not from the seller budget.
Other transaction analysis
Page 33
Appendix E
Detailed FDD Backup Schedules
Monthly NWC detail, TTM, $K
| Month | NWC | Month | NWC |
|---|---|---|---|
| Jan | 1,500 | Jul | 1,650 |
| Feb | 1,560 | Aug | 1,680 |
| Mar | 1,526 | Sep | 1,692 |
| Apr | 1,560 | Oct | 1,650 |
| May | 1,590 | Nov | 1,610 |
| Jun | 1,608 | Dec | 1,574 |
| Average | 1,600 |
Payables aging at year end, $K
| Bucket | Amount | Share |
|---|---|---|
| Current | 498 | 70% |
| 1 to 30 days | 142 | 20% |
| 31 to 60 days | 50 | 7% |
| Over 60 days | 20 | 3% |
| Total | 710 | 100% |
Appendix E, FDD schedules
Page 34
End of sample
This is an illustrative report.
Harbor Manufacturing is a fictional business. Every page here shows what a Chief report contains and how it is organized. No figure describes a real company or transaction.
End of sample
Page 35
Swipe, scroll, or use the arrows to turn pages.
02 · Adjustments
Every adjustment gets tested.
An addback isn't valid just because management proposed it. Each one is tested against source documents.
Adjustment review
| Adjustment | Borrower proposed | Chief supported | Evidence | Status |
|---|---|---|---|---|
| Owner compensation | +$120K | +$120K | General ledger · Payroll · Tax return | SUPPORTED |
| One-time legal expense | +$45K | +$45K | Legal invoices · Settlement · GL | SUPPORTED |
| Related-party rent | +$35K | +$35K | Lease · Market rent comparison | SUPPORTED |
| Non-recurring revenue | −$22K | −$22K | Sales ledger · Invoice | SUPPORTED |
| Vehicle / personal expenses | +$36K | +$18K | Bank statements · GL · Management explanation | PARTIALLY SUPPORTED |
| “Growth investment” | +$31K | +$0K | Management explanation only | EXCLUDED |
| Total | +$245K | +$196K |
03 · Bridge
See exactly how normalized earnings were built.
EBITDA bridge
TTM · $K
| Line | Amount |
|---|---|
| Reported EBITDA | $615K |
| + Supported adjustments | +$218K |
| − Normalizing items (non-recurring revenue) | −$22K |
| Normalized EBITDA | $811K |
$615K +$218K −$22K = $811K. Of +$245K proposed, $49K wasn't supported and stays in operating expense.
04 · Evidence
Evidence matters as much as the adjustment.
Vehicle / personal expenses
- Borrower proposed
- +$36K
- Chief supported
- +$18K
- Conclusion
- PARTIALLY SUPPORTED
Evidence
- Bank statements
- GL
- Management explanation
Analyst rationale
$18K traces to a vehicle used by the seller's family. The work truck remains an operating expense. The unsupported portion remains an operating expense.
05 · Into the deal
Normalized earnings flow directly into the deal analysis.
Chief is designed so the earnings analysis doesn't have to be rebuilt separately by every participant in the transaction.
- ↓→
Normalized EBITDA
$811K
- ↓→
Valuation
$4.8M at 5.9x
- ↓→
Debt service coverage
1.34x
Living Credit Record
Preserved after close
Built for SBA acquisition diligence
Designed around SBA change-of-ownership lending.
Chief's QoE workflow is built around the historical earnings, normalization, evidence, and transaction analysis relevant to SBA change-of-ownership lending, and built to meet applicable SBA Quality of Earnings requirements under SOP 50 10 8.1.
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Structured data / API
- Reported EBITDA
- Adjustment
- Supported amount
- Adjustment status
- Evidence
- Normalized EBITDA
- Revenue
- Margins
- Working capital
- Concentration
- Key findings
The QoE doesn't have to stay trapped in the report.
Valuation + QoE
Two reports. One financial story.
The QoE supports the earnings. The valuation supports the value.
Quality of Earnings
- Reported EBITDA$615K
↓
- Supported adjustments+$196K
↓
- Normalized EBITDA$811K
Valuation
- Normalized EBITDA$811K
↓
- Valuation methods3
↓
- Concluded value$4.8M
Delivery
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Chief delivers lender-ready Valuation and Quality of Earnings reports with the schedules, support, and analysis needed to understand how the conclusion was reached.
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- Valuation
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Quality of Earnings
$10KUnder 2.5 weeks*
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