What Is a Quality of Earnings (QoE) Report and Why Buyers Require One

Damilola Esebame

on December 1, 2025

Damilola Esebame

on December 1, 2025

Written by Damilola Esebame

Edited by Omobolade Ajibade

What Is a Quality of Earnings (QoE) Report and Why Buyers Require One

Key Takeaways

A quality of earnings (QoE) report is a financial due diligence document that assesses the accuracy, sustainability, and quality of a company’s reported earnings during M&A transactions.

Unlike audited financial statements, which assess GAAP compliance, QoE reports focus on normalized EBITDA, working capital, and the sustainability of cash flows.

Buyers require QoE reports because they help identify non-recurring revenues, owner expenses, accounting irregularities, and other issues that could affect the purchase price.

QoE reports can be buy-side (requested by the buyer) or sell-side (requested by the seller), with each serving different strategic purposes in the transaction process.

Costs typically range from $5,000 for smaller transactions to over $100,000 for mid-market deals, depending on the complexity and scope of the analysis.

When a buyer considers acquiring a business, the seller’s financial statements only tell part of the story. Net income figures, while important, can mask underlying issues that significantly affect a company’s true earning power. This is where a quality of earnings report becomes essential to the due diligence process.

A quality of earnings (QoE) report is a comprehensive financial analysis conducted by an independent third party; typically a CPA firm specializing in transaction advisory services, that digs beneath the surface of a company’s financial statements. The report evaluates whether reported earnings accurately reflect the sustainable, recurring income that the business can be expected to generate going forward.

For anyone involved in mergers and acquisitions, understanding what a QoE report contains and why buyers consider it indispensable can make the difference between a successful transaction and a costly mistake.

What Is a Quality of Earnings Report?

A quality of earnings report is a financial due diligence document prepared in connection with an anticipated merger, acquisition, or divestiture. The report analyzes a target company’s historical financial performance, identifies potential transaction risks, and evaluates the sustainability of earnings. According to Weaver’s transaction advisory practice, QoE reports are “intended to cut through bias and are generally performed by an independent, third-party accounting firm with a team that specializes in QoE analyses.”

The central focus of any QoE report is validating or confirming a target company’s key financial metrics, with particular emphasis on EBITDA (earnings before interest, taxes, depreciation, and amortization). EBITDA serves as a proxy for operating cash flow and is the metric most commonly used to value middle-market businesses. Since most acquisitions are priced as a multiple of EBITDA, even small adjustments to this figure can have outsized effects on the purchase price.

The QoE analysis goes beyond what traditional audits cover. While an audit confirms that financial statements comply with generally accepted accounting principles (GAAP), a QoE report asks different questions: Are these earnings sustainable? Are there one-time events inflating the numbers? What does the business truly earn on a normalized basis?

How QoE Reports Differ from Audits

Many business owners assume that audited financial statements provide everything a buyer needs to make an informed decision. However, audits and QoE reports serve fundamentally different purposes.

An audit’s primary objective is to confirm whether financial statements comply with GAAP. The auditor issues an opinion on whether the statements present fairly, in all material respects, the financial position of the company. Items that are technically correct under GAAP may still create deal issues or require purchase price adjustments.

A QoE report, by contrast, facilitates an M&A transaction specifically. The analysis focuses on what buyers care about most: sustainable earnings, working capital requirements, and hidden risks. As Moss Adams notes, “audits cover an annual period and don’t show recent trends. Buyers rely on the most recent information, specifically the trailing twelve month (TTM) period for setting value and for debt financing underwriting.”

Auditors examine numbers on an annual basis, while QoE analysts look at adjusted figures on a monthly basis to identify trends, seasonality, and anomalies. This granular approach provides a more refined picture of the company’s actual earning power.

What Does a QoE Report Analyze?

A comprehensive QoE report examines multiple aspects of a company’s financial health. According to Warren Averett’s transaction advisory team, three key areas form the essential components of any QoE analysis: adjusted EBITDA, proof of cash, and working capital.

Adjusted EBITDA Analysis

The heart of any QoE report is the EBITDA analysis, which involves validating reported earnings through a deep dive into the profit and loss statement and balance sheet. The analysis identifies adjustments that fall into three categories: due diligence adjustments identified by the advisory team, management-proposed adjustments for extraordinary items, and pro forma adjustments reflecting changes that will occur post-transaction.

Common adjustments include removing non-recurring expenses like lawsuit settlements or one-time consulting fees, adding back owner expenses that would not continue under new ownership (such as above-market salaries, personal vehicles, or family member compensation), and correcting revenue recognition issues where the timing of recorded revenue does not match when it was actually earned.

Working Capital Assessment

The QoE report assesses the company’s working capital position to understand cash cycles and the capital required to operate the business. This analysis examines current assets and liabilities, the company’s ability to manage cash flow efficiently, and any areas of concern. Negative net working capital can raise liquidity concerns and may require the buyer to provide additional capital after closing.

Different industries have different working capital realities. A manufacturing company with significant inventory requirements will have vastly different working capital needs than a professional services firm. The QoE analysis is tailored to reflect these industry-specific considerations.

Revenue and Customer Analysis

The report evaluates revenue recognition practices, customer concentration risks, and sales trends. If a significant portion of revenue comes from a single customer or a small group of customers, this concentration represents a risk that could affect valuation. Similarly, if revenue has been declining or shows unusual spikes, the QoE analysis will investigate whether these patterns are sustainable.

The Corporate Finance Institute illustrates this with an example: a company that received substantial revenue from a single large Amazon project would appear much more valuable without understanding that this revenue was non-recurring. “Without a quality of earnings report, ABC’s value could appear greatly inflated,” they note.

Buy-Side vs. Sell-Side QoE Reports

QoE reports can be prepared from either the buyer’s or seller’s perspective, and understanding the difference is important for anyone contemplating a transaction.

Buy-Side Reports

A buy-side QoE report is commissioned by the potential acquirer as part of their due diligence process. The buyer typically pays for this analysis, which aims to minimize the informational advantage that sellers naturally have regarding their own business. According to Morgan & Westfield, buy-side QoE analysis helps “level any financial information differences between the buyer and seller.”

The buy-side report helps acquirers understand what they are really purchasing, identify risks that could affect the transaction, and determine whether the proposed price is justified by the company’s sustainable earnings.

Sell-Side Reports

Increasingly, sellers are commissioning their own QoE reports before going to market. While this represents an additional upfront cost, sell-side reports offer several strategic advantages.

First, they provide a “dry run” of due diligence, allowing sellers to identify and address issues before buyers discover them. Second, they demonstrate transparency and professionalism, which can increase buyer confidence. Third, the process of preparing for a sell-side QoE often results in assembled documentation that accelerates the buy-side due diligence process.

Perhaps most importantly, sell-side QoE reports often support higher purchase prices. Because M&A transactions are valued as multiples of earnings, identifying legitimate add-backs and presenting clean, well-documented financials can directly increase the company’s valuation.

Why Buyers Require QoE Reports

M&A transactions are rarely conducted without a QoE report, and for good reason. The stakes are simply too high to rely solely on the seller’s representations or even audited financial statements.

Buyers require QoE reports because they need to verify that reported earnings are real and sustainable. A company might show strong profits on paper while experiencing significant cash flow problems, or revenues might include one-time windfalls that will not repeat. The QoE report separates actual operating performance from accounting adjustments and extraordinary items.

Additionally, lenders financing the acquisition typically require a QoE report as part of their underwriting process. Banks want independent verification that the cash flows they are counting on to service the debt actually exist and will continue.

Private equity firms, which are particularly active acquirers of middle-market businesses, have made QoE reports standard practice. These sophisticated buyers understand that thorough financial due diligence protects their investors and improves the likelihood of achieving targeted returns.

According to HCVT’s M&A practice, “normalized EBITDA is a critical metric for buyers and sellers to understand the true earnings power of a business.” The QoE report provides the analysis needed to arrive at this normalized figure with confidence.

What Does a QoE Report Cost?

The cost of a QoE report varies significantly based on the size and complexity of the target company, the scope of the analysis, and the reputation of the firm performing the work.

For smaller transactions, a minimal QoE report might cost as little as $5,000. Mid-market transactions typically require more extensive analysis, with costs ranging from $25,000 to over $100,000. According to Morgan & Westfield, “private equity firms like to see well-known regional firms prepare these for companies above $10 million to $25 million in revenue.”

Factors affecting cost include the company’s revenue size, the complexity of its operations and accounting, the quality of existing documentation, whether the company has multiple locations or business units, and the timeline for completing the analysis. A company with clean books and well-organized records will typically incur lower QoE costs than one requiring extensive reconstruction of financial information.

While these costs may seem substantial, they pale in comparison to the potential cost of acquiring a business based on overstated earnings or discovering hidden problems after closing.

The QoE Process and Timeline

The QoE analysis is typically conducted during the due diligence phase of an M&A transaction, after an initial agreement (usually a letter of intent) has been reached but before the final deal closes. This timing allows both parties to review findings and make necessary adjustments to transaction terms.

The process begins with document requests. The QoE team will ask for recent financial statements, trial balances, bank reconciliations, management reports, and key contracts. Companies should expect requests for accounts receivable and payable aging, inventory records, and detailed revenue breakdowns by customer and product line.

Following document review, the QoE team conducts interviews with management to understand accounting policies, unusual transactions, and business operations. These discussions help the analysts interpret the data and identify areas requiring deeper investigation.

The final QoE report typically includes an executive summary, detailed analysis of adjusted EBITDA and the adjustments made, working capital analysis, assessment of accounting policies and practices, and identification of potential risks and opportunities.

Depending on complexity, the process generally takes two to four weeks, though expedited timelines are possible when documentation is well-organized and readily available.

The Bottom Line

A quality of earnings report is far more than a box to check in the due diligence process. It is a critical analytical tool that helps buyers understand what they are truly acquiring and helps sellers present their business in the most accurate and favorable light.

The report goes beyond audited financial statements to assess the sustainability and quality of earnings, normalized working capital requirements, and potential risks that could affect the transaction. For buyers, this analysis provides the confidence needed to proceed with an acquisition and the information required to structure appropriate deal terms. For sellers, a proactive QoE report can identify issues early, accelerate the transaction process, and support a higher purchase price.

In an environment where M&A transactions routinely involve millions of dollars, the investment in a thorough QoE analysis is a small price to pay for the assurance it provides.