When a seller hands you three years of financials, they're showing you the story they want you to believe. A Quality of Earnings report — commonly called a QoE — is how a buyer finds out if that story is true.
Put simply, a QoE is an independent financial analysis that examines whether a business's reported earnings accurately reflect its underlying economic reality. It's not an audit. It's not a tax return review. It's a focused investigation into the quality and sustainability of a company's profits.
Why Earnings Need a "Quality" Check
Business financials are prepared by the seller — or their accountant — and they aren't required to follow the same rules a public company would. In small and mid-sized businesses, this means a few things routinely show up in the numbers.
Owner perks run through the business. A seller's personal car, family health insurance, or vacation travel may all appear as business expenses. These reduce reported profit — but they won't be your expenses after you take ownership.
One-time items inflate or deflate results. A single large customer contract, a legal settlement, or a one-time equipment sale can make one year look far better or worse than a typical year. These need to be identified and removed.
Revenue may not be as reliable as it looks. Is revenue growing, or did the seller pull forward future orders? Are there customer concentrations — one client making up 40% of sales — that create real risk?
A QoE analyst works through all of this systematically, adjusting the financials to arrive at a cleaner, more accurate picture of what the business actually earns.
The central number in a QoE is typically adjusted EBITDA — earnings before interest, taxes, depreciation, and amortization, after removing non-recurring items and owner-specific expenses. This is the number your purchase price multiple will be applied to. Getting it right matters enormously.
What a QoE Actually Covers
A standard Quality of Earnings report typically includes an analysis of revenue trends and customer concentration, a detailed review of expense addbacks, working capital patterns (how much cash the business needs to operate day-to-day), and any unusual accounting practices that may distort the numbers.
Depending on the deal size and complexity, a QoE may also examine the quality of the balance sheet, the reliability of management's projections, and operational risks that could affect future earnings.
Who Orders a QoE — and When
In most middle-market transactions, the buyer commissions the QoE after a letter of intent is signed but before the deal closes. At that stage, you've agreed on a price in principle — but you haven't verified the numbers it's based on. That's what the QoE confirms or challenges.
Sellers sometimes commission their own QoE before going to market, using it as a signal of transparency to attract buyers and accelerate due diligence. This is increasingly common in competitive processes where sellers want to control the narrative.
A QoE Is Not an Audit
This distinction matters. An audit is a formal attestation — an accounting firm certifying that financial statements comply with accounting standards. A QoE is an investigative analysis focused on economic reality, not compliance. QoE analysts ask different questions: not "are these numbers GAAP-compliant?" but "are these earnings real, recurring, and representative of what you'll own?"
For most buyers of private businesses under $50M in revenue, a QoE delivers far more decision-relevant information than an audit ever would.
If you're acquiring a business, a Quality of Earnings report is the difference between buying what you think you're buying and discovering unpleasant surprises after the check clears. It's due diligence done right — not a formality, but a fundamental tool for making a sound investment decision.
QoEPro provides buy-side Quality of Earnings reports for independent sponsors, search fund entrepreneurs, and private equity buyers in the lower middle market. Our reports are built for deal-makers who need clarity fast. View report options →