When a business is being sold, most owners and buyers focus on top-line numbers — revenue, profit, and EBITDA. But smart buyers go deeper. That’s where a quality of earnings report comes in.
In this article, we’ll explain what a QoE report is, what goes into it, and why it has become a standard expectation in most business transactions.
What Is a Quality of Earnings (QoE) Report?
A quality of earnings report is an in-depth financial analysis that goes beyond surface-level financial statements. Its goal is to validate how much of a company’s earnings are repeatable, sustainable, and truly reflective of operational performance.
It is typically commissioned by the buyer (buy-side QoE) or the seller (sell-side QoE) and conducted by an independent advisor — often someone with M&A, CPA, and valuation expertise.
Why Buyers Expect One?
Buyers use QoE reports to:
- Assess whether the reported EBITDA is accurate and normalized
- Identify risks that aren’t visible in standard financials
- Understand working capital needs and cash flow consistency
- Validate revenue sources, margins, and expense trends
- Support deal structuring and price negotiations
Without it, buyers are flying blind. With it, they can make informed decisions, negotiate better, and avoid post-deal regrets.
What’s Included in a Quality of Earnings Report?
While every report is tailored to the business and industry, most QoE reports include:
- EBITDA Normalization Adjusting earnings for one-time events, non-operating income or expenses, and owner-specific items like personal travel or discretionary spending.
- Revenue Analysis Reviewing trends, customer concentration, seasonality, recurring vs. non-recurring revenue, and contract terms.
- Gross Margin Review Evaluating cost of goods sold, vendor stability, pricing strategies, and any margin volatility.
- Operating Expense Review Analyzing SG&A (selling, general, and admin) expenses for unusual fluctuations, non-recurring items, and scalability.
- Working Capital Analysis Understanding how much working capital is needed to operate the business and calculating a working capital target for the purchase agreement.
- Cash Flow Adjustments Assessing true free cash flow and identifying any debt-like items not on the balance sheet.
- Risk Factors Highlighting issues such as inconsistent reporting, key personnel dependence, pending litigation, or tax exposures.
How It Helps Sellers Too
While QoE reports are often seen as a buyer’s tool, smart sellers now commission their own report before going to market.
Here’s why:
- It helps defend your EBITDA and valuation
- It gives you time to fix or explain financial issues
- It builds buyer confidence and shortens due diligence timelines
- It reduces the risk of last-minute price reductions
When Should a QoE Be Done?
Ideally, the QoE process should begin shortly after a letter of intent (LOI) is signed in a buy-side deal, or a few months before marketing the business in a sell-side situation.
In either case, the earlier the financials are clarified, the more leverage you have in negotiations.
Who Should Prepare a QoE Report?
Not your regular bookkeeper or internal controller. A strong QoE provider should have deep experience in financial due diligence, M&A deal structures, and valuation analysis — preferably someone with CPA and CBV credentials who understands how buyers think.
Final Thoughts
A quality of earnings report is not just a box to check. It’s one of the most valuable tools in the entire M&A process — protecting buyers from overpaying and helping sellers justify a higher valuation.
If you’re considering a sale or acquisition, investing in a QoE report is a smart first step.
Learn more about how we support both buyers and sellers with QoE reports and transaction diligence.
Ready to discuss a potential engagement? Contact us today.
