Quality of Earnings
Quality of Earnings Reports. Defend the Number That Sets the Price.
Independent QoE analysis that shows buyers, sellers, and lenders what earnings are real, repeatable, and worth paying for.
Quick Answer
What is a quality of earnings report?
A quality of earnings report is an independent analysis, prepared for an acquisition or sale, that tests whether a company's reported EBITDA is accurate and sustainable. It bridges reported to adjusted EBITDA, analyzes revenue and margin quality, sets a net working capital peg, reconciles revenue to cash, and flags debt-like items and risks that should affect the purchase price.
Key Takeaways
- Price is a multiple of EBITDA, so every unsupported dollar costs several.
- A QoE is not an audit; it tests economic reality, not accounting compliance.
- A sell-side QoE helps owners avoid late-stage price cuts.
- Expect four to eight weeks from data room to final report.
Last reviewed by the Sataurius advisory team.
Why Buyers Insist on a QoE
Purchase prices are set as a multiple of EBITDA. Every dollar of EBITDA that cannot be supported is worth several dollars of price. A quality of earnings report is how buyers and lenders test that number before they commit capital.
What We Analyze
- Adjusted EBITDA: owner compensation, one-time items, related-party transactions, and run-rate adjustments.
- Revenue quality: customer concentration, churn, recurring versus project revenue, and recognition timing.
- Margins: gross and contribution margin by product, channel, or service line.
- Net working capital: trends, seasonality, and a supportable peg for the purchase agreement.
- Proof of cash: reconciling reported revenue to actual bank deposits.
- Debt-like items: deferred revenue, accrued liabilities, and anything that should reduce the price.
Sell-Side and Buy-Side
For sellers, a QoE pairs naturally with a business valuation and an exit plan. For buyers, it is the core of financial due diligence. Both sit within our transaction advisory services, and we also run QoE for healthcare deals.
FAQ
Frequently Asked Questions
What is a quality of earnings report?
A quality of earnings (QoE) report is an independent financial analysis, prepared during an M&A transaction, that tests whether a company's reported EBITDA is accurate, sustainable, and repeatable. It identifies normalization adjustments, examines revenue and margin trends, analyzes working capital, and highlights risks a buyer or lender should price in.
What is included in a quality of earnings report?
Typically: adjusted EBITDA with a bridge from reported figures, revenue analysis by customer, product and channel, gross margin trends, a net working capital analysis and peg, proof of cash, debt and debt-like items, and a summary of key risks and findings.
Is a quality of earnings report the same as an audit?
No. An audit gives an opinion on whether financial statements follow accounting standards. A QoE report focuses on the economic reality of earnings and cash flow for the purpose of a transaction. A company can have clean audited statements and still see significant QoE adjustments.
Should a seller get a quality of earnings report?
Often, yes. A sell-side QoE lets the owner find and fix issues before buyers do, supports the asking price, shortens diligence, and reduces the risk of a late-stage price cut. It is especially valuable for businesses with owner-related expenses or inconsistent accounting.
How long does a quality of earnings report take?
Usually four to eight weeks, depending on company size, complexity, and how quickly the data room and accounting records can be provided.
Who pays for the quality of earnings report?
The buyer typically commissions a buy-side QoE as part of diligence. A seller commissions a sell-side QoE before going to market. Lenders frequently require a QoE before financing an acquisition.