The report that has become the center of every deal
A quality of earnings (QoE) report is an accountant’s deep examination of how a company actually makes money: whether reported EBITDA is real, repeatable, and correctly measured. In today’s middle market, virtually every buyer commissions one during diligence — and increasingly, well-advised sellers commission their own before going to market.
What a QoE actually examines
Revenue quality. Is revenue recognized correctly? Is it recurring or episodic? Are there customer concentrations, one-time projects, or channel arrangements dressing up the run rate?
EBITDA adjustments. Every add-back gets tested: owner compensation against market rates, personal expenses, one-time items that turn out to recur, and pro-forma adjustments for changes that have not happened yet.
Net working capital. What level of working capital does the business actually need through its cycle? This analysis sets the target that determines whether cash moves toward you or away from you at closing.
Proof of cash. Reported earnings are tied to actual bank activity — the fastest way to surface aggressive accounting.
QoE is not an audit
An audit asks whether financial statements comply with accounting standards. A QoE asks a buyer’s question: what is the true, sustainable earning power of this business? A company can pass a clean audit and still have poor earnings quality — and a business with unaudited statements can demonstrate excellent earnings quality with the right documentation.
Why sellers commission their own
A sell-side QoE, done during preparation, does three things. It validates your adjusted EBITDA before buyers test it, so the number you market is the number that survives. It accelerates diligence, because the buyer’s team starts from an organized, pre-analyzed baseline. And it protects negotiating leverage: the worst time to learn about a working-capital issue or an unsupportable add-back is under exclusivity, when your alternatives have gone home.
What it costs and when to do it
For lower-middle-market companies, sell-side QoE engagements typically run from the tens of thousands into low six figures depending on complexity — small against the enterprise-value swing a single disallowed add-back can cause. The right time is during pre-market preparation, three to six months before buyers are contacted.
Common questions from owners
What is a quality of earnings report?
A quality of earnings (QoE) report is a focused financial analysis — usually by a transaction-specialist accounting firm — that tests whether a company's reported EBITDA is accurate, sustainable, and properly adjusted. It examines revenue quality, add-backs, working capital needs, and ties earnings to cash.
Is a quality of earnings report the same as an audit?
No. An audit tests compliance with accounting standards; a QoE tests the economic reality of earnings from a buyer's perspective. Many audited companies still have QoE findings, and many unaudited companies demonstrate strong earnings quality.
Do I need a sell-side QoE before going to market?
It has become standard practice for well-prepared sellers in the middle market. It validates your EBITDA before buyers attack it, speeds up diligence, and prevents late-stage surprises — which are the most expensive kind.
How much does a quality of earnings report cost?
For lower-middle-market companies, typically tens of thousands of dollars up to low six figures depending on size and complexity. Against the valuation impact of a single failed add-back, it is one of the highest-return investments in the process.
What does a QoE mean for my add-backs?
Every add-back will be tested for documentation and recurrence. Legitimate, well-documented adjustments survive and get paid for; aggressive or unsupported ones get struck — and can erode the buyer's trust in the rest of your numbers.