Quality of Earnings: What a QoE Report Really Tells You
A quality of earnings report is the document that decides whether a deal closes at the agreed price. Here is what a QoE report is, what goes into it, and why both buyers and sellers commission one before an M&A transaction.
Updated June 2026 · 7 min read
A quality of earnings report, almost always shortened to QoE, is not an audit. It is a focused analysis of whether a company's reported profit is real, repeatable, and transferable to a new owner. In a sale, the QoE is often the difference between a deal that closes at the agreed price and one that gets re-traded at the eleventh hour.
What a quality of earnings report is
The QoE takes the seller's financial statements and asks a harder question than the books do: how much of this profit will actually continue under new ownership? It strips out one-time items, owner-specific expenses, and accounting quirks to arrive at a normalized earnings number that a buyer can underwrite. The headline output is usually an adjusted EBITDA figure, supported by a detailed analysis of how the business actually makes money.
Quality of earnings versus an audit
People assume audited financials make a QoE unnecessary. They answer different questions:
An audit
Looks backward and gives an opinion on whether the financial statements follow accounting standards for a past period. It is about compliance, not about the deal.
A quality of earnings report
Looks forward and is built for the transaction. It tests whether the earnings are sustainable, what the true normalized EBITDA is, and where the risks sit. Buyers commission a QoE even when audited statements already exist.
What is inside a QoE report
A quality of earnings report goes well beyond the income statement. The core sections usually include:
- EBITDA adjustments and add-backs. One-time legal costs, owner salary above or below market, personal expenses run through the business, and non-recurring revenue are added back or removed to reach a clean number.
- Adjusted, normalized EBITDA. The single figure most of the negotiation runs on, with every adjustment documented so it survives scrutiny.
- Revenue quality and customer concentration. Is the revenue recurring or one-off? How much of it sits with one or two customers? Concentration is one of the most common value killers.
- Net working capital. A normalized working-capital target, so the buyer is not surprised by a cash shortfall right after closing.
- Proof of cash. Tying reported revenue and earnings back to the bank statements, to confirm the profit is real.
Adjusted EBITDA is what the purchase price is usually built on, through a multiple. Move adjusted EBITDA by a small amount and, at a 5x multiple, the price moves five times as much. That is why both sides care so much about which add-backs are defensible.
Sell-side versus buy-side QoE
A quality of earnings report can be commissioned by either party, and the timing and purpose differ:
Buy-side QoE
The buyer commissions it during due diligence, after a letter of intent, to stress-test the seller's numbers before money changes hands. It protects against overpaying and surfaces issues that justify a lower price or different terms.
Sell-side QoE
The seller commissions it before going to market. It finds the weak spots first, documents the add-backs, supports the asking price, and reduces the chance a buyer re-trades the deal after diligence. For lower middle market sellers, a clean sell-side QoE is one of the highest-return things you can do before a sale.
Who needs one, and when
QoE work is standard in lower middle market M&A, roughly deals from a few million up to a few hundred million in value. Buyers should plan for a buy-side QoE as soon as a letter of intent is signed. Sellers should commission a sell-side QoE several months before going to market, so there is time to fix what it finds rather than explain it under pressure at the negotiating table.
We prepare and review quality of earnings reports as part of our M&A consulting and financial due diligence practice, on both the sell side and the buy side. We also handle business valuation and the financial cleanup that makes a company easier to sell.
This guide is general information, not accounting, tax, or investment advice. Every transaction is different, and the right scope for a QoE depends on your facts. Please speak with a qualified CPA before acting. See our full disclaimer.
Quality of earnings questions we hear most
What is a quality of earnings report?
A QoE is a financial analysis that tests whether a company's reported profit is real, repeatable, and transferable to a new owner. It normalizes EBITDA for one-time and owner-specific items and examines revenue quality, working capital, and cash, so a buyer or seller can rely on the numbers in an M&A deal.
Is a QoE report the same as an audit?
No. An audit gives an opinion on whether financial statements follow accounting standards for a past period. A QoE is forward-looking and deal-focused: it asks whether the earnings will continue under new ownership and what the true, normalized EBITDA is.
Should the buyer or the seller commission the QoE?
Either can. A buy-side QoE protects the buyer by stress-testing the seller's numbers before closing. A sell-side QoE, prepared before going to market, lets the seller find and explain issues early, support the asking price, and reduce the chance the deal is re-traded.
When should I commission a quality of earnings report?
Buyers usually commission a QoE during due diligence, after a letter of intent. Sellers should commission a sell-side QoE before going to market, ideally several months ahead, so there is time to clean up the issues it surfaces.
Buying or selling a business?
Talk to a partner about a sell-side or buy-side quality of earnings report. No sales pitch, and what you share stays confidential.
Schedule a Private Consultation