What Is a Quality of Earnings Report?

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: 

1. EBITDA Normalization Adjusting earnings for one-time events, non-operating income or expenses, and owner-specific items like personal travel or discretionary spending. 

2. Revenue Analysis Reviewing trends, customer concentration, seasonality, recurring vs. non-recurring revenue, and contract terms. 

3. Gross Margin Review Evaluating cost of goods sold, vendor stability, pricing strategies, and any margin volatility. 

4. Operating Expense Review Analyzing SG&A (selling, general, and admin) expenses for unusual fluctuations, non-recurring items, and scalability. 

5. Working Capital Analysis Understanding how much working capital is needed to operate the business and calculating a working capital target for the purchase agreement. 

6. Cash Flow Adjustments Assessing true free cash flow and identifying any debt-like items not on the balance sheet. 

7. 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. 

Disclaimer: This blog post is intended for informational purposes only and does not constitute legal, financial, or tax advice. Always consult with a qualified professional before making decisions related to business purchases or valuations.