If you're getting close to selling your business, there's a good chance a buyer will ask for a quality of earnings report, or QoE. It can sound intimidating if you haven’t ever had one prepared, but the idea is simple. A quality of earnings report is an independent review of your financials that checks whether the earnings you're selling on are real, accurate, and likely to continue. It's how buyers can be confident that the numbers they built their offer on are reliable.
That matters because your price is usually your earnings times a multiple. This guide explains what a QoE report covers, how it differs from an audit, what it costs, and how to prepare, so there are no surprises. For the full selling process, see our guide on how to value and sell your business.
Key takeaways
- A QoE report is an independent review of whether your earnings are real, accurate, and repeatable.
- The report focuses on adjusted EBITDA, add-backs, revenue, cash, and working capital.
- Buyers often order one during due diligence, but sellers can commission their own before going to market.
- Findings can change your price, so issues are much cheaper to fix before a buyer finds them.
- The best preparation for a QoE is having clean books and documentation for every add-back.
What is a quality of earnings report?
The QoE meaning is straightforward: QoE stands for quality of earnings. A quality of earnings report is a detailed financial analysis, usually prepared by an independent accounting firm, that tests whether a company's reported earnings reflect how the business actually performs and whether those earnings are likely to continue under a new owner.
In finance, "quality" has a specific meaning. High-quality earnings are:
- Accurate: backed by bank records, invoices, and contracts
- Recurring: coming from ongoing work, not one-time events
- Sustainable: likely to continue after the sale, without depending on the current owner
A QoE report doesn't give your business a grade or tell a buyer what to pay. It gives both sides a verified earnings number to negotiate from, usually adjusted EBITDA. If you're not sure how adjusted EBITDA works, our SDE vs. EBITDA guide walks through it with a sample business.
What does a quality of earnings analysis look at?
Every accounting firm has its own approach, but most quality of earnings analysis work covers the same core areas:
1. Adjusted EBITDA and add-backs. This is the heart of the report. Accountants review every adjustment you've made to your earnings, like owner pay, personal expenses, and one-time costs, and decide which ones hold up. Undocumented or recurring "one-time" add-backs are the most common items to get reduced or removed.
2. Revenue quality. Where does your revenue come from, and how reliable is it? The review looks at recurring versus one-time work, customer concentration, contract terms, and whether revenue is recorded in the right period. A large job booked early can make one year look stronger than it really was.
3. Proof of cash. The accountants compare your reported revenue and expenses with your actual bank deposits and payments. If the books and bank statements don't match, that gap needs an explanation, and the report will rely on the bank records.
4. Net working capital. Working capital is the cash, receivables, and inventory the business needs to operate day to day. The QoE helps set a "normal" level, often called the working capital target or “peg”. If you deliver less working capital than the target, the purchase price usually goes down by the difference.
5. Trends and run-rate. The review looks at how results have changed over time, often the last two to three years compared with the most recent twelve months, to see whether earnings are growing, flat, or declining.
6. Other risks. Depending on the business, a QoE may also flag debt-like items (such as unpaid taxes, deferred revenue, or customer deposits), related-party arrangements, or pending liabilities that affect what the business is really worth.
QoE vs. audit: what's the difference?
An audit answers "Are these statements prepared correctly?" A quality of earnings report answers "Are these earnings real, and will they keep coming?" A business can pass an audit and still have earnings a buyer wouldn't pay for, like a major customer that's about to leave.
Sell-side vs. buy-side QoE
There are two kinds of QoE reports, depending on who orders it.
A buy-side QoE is common. Many institutional buyers and lenders expect one before they'll close, and it usually happens after you've signed a letter of intent.
A sell-side QoE is optional, but increasingly common in the lower middle market. You hire an independent firm to review your numbers the way a buyer would, before any buyer sees them. It won't replace the buyer's own review, but it gives you:
- A chance to fix problems early, while you still have time and leverage
- A defensible earnings number to market your business on
- Faster diligence, since much of the work is already done
- Fewer surprises, and fewer late-stage price cuts
Whether it's worth the cost depends on your size and how clean your books are. For a business with complex add-backs or inconsistent records, it's often money well spent.
What a QoE can change: our sample HVAC company
In our SDE vs. EBITDA guide, we followed a sample HVAC service company with about $3 million in revenue and $485,000 in adjusted EBITDA. Here's what could happen when a buyer's QoE team reviews those numbers:
Sample figures for illustration only.
That's a $60,000 difference in earnings. At a 4.0× multiple, it lowers the estimated value from $1.94 million to $1.70 million, a $240,000 drop, from three items that each seemed small on their own.
Now imagine the owner had commissioned a sell-side QoE a year earlier. They could have started a mileage log, recorded that job in the right period, and gone to market with a number that holds up. The business wouldn't have changed, but the price conversation would have.
How much does a QoE cost, and how long does it take?
Cost depends on the size and complexity of the business, the quality of its records, and the scope of the review. For lower middle market businesses, a QoE often costs in the tens of thousands of dollars. Businesses with multiple locations, many add-backs, or messy books cost more.
Timing is often three to six weeks once the accounting firm has everything it needs. The biggest source of delay is usually the seller: slow responses to requests and missing documents stretch the timeline. Organized records are the fastest way to shorten it.
Why buyers and lenders ask for a QoE
A buyer's offer is built on your earnings. Before they commit millions of dollars, they want an independent check that those earnings are real. That's especially true today. Buyers have become more cautious about paying for one strong year and focus more on whether results hold up over time.
Lenders often want a QoE for the same reason. If a buyer is financing part of the purchase, the lender needs confidence that the business can support the loan.
A QoE also protects you as the seller. When both sides work from the same verified numbers, negotiations are more straightforward, and there are fewer grounds for a buyer to lower the price late in the process.
How to prepare for a QoE
Whether you commission a sell-side QoE or expect a buyer to order one, the preparation is the same:
- Reconcile your books with your bank statements for at least the last three years.
- Document every add-back with receipts, invoices, or a clear written explanation.
- Separate personal and business expenses going forward, not just on paper.
- Switch to accrual accounting if you're on a cash basis, so revenue and costs land in the right period.
- Organize customer data: revenue by customer, contract terms, and recurring versus one-time work.
- Track your working capital monthly so you know what's normal for your business.
- Flag anything unusual before the accountants find it, like a lawsuit, a lost customer, or a one-time spike, and prepare an explanation.
Most of this overlaps with preparing your business for sale in general.
Common mistakes sellers make with a QoE
- Counting add-backs they can't prove. If there's no receipt or record, expect it to be removed.
- Calling recurring costs "one-time." An unusual repair every year isn't unusual.
- Ignoring working capital. Owners often focus on price and overlook the working capital target, which can change what they receive at closing.
- Waiting to clean up the books. Fixing records during diligence is slower, costlier, and signals risk to a buyer.
- Treating the QoE as adversarial. The accountants are verifying numbers, not trying to lower your price. Fast, honest answers keep the process moving and build trust.
Frequently asked questions
What is QoE in finance?
In finance, QoE stands for quality of earnings. It describes how accurate, recurring, and sustainable a company's earnings are. A QoE report is an independent analysis, usually by an accounting firm, that tests those earnings before a business is sold or financed.
Is a quality of earnings report the same as an audit?
No. An audit confirms that financial statements follow accounting standards and results in a formal opinion. A QoE report focuses on whether earnings are real and sustainable, especially adjusted EBITDA, add-backs, cash, and working capital.
Who pays for a quality of earnings report?
Buyers usually pay for a buy-side QoE during due diligence. Sellers pay for a sell-side QoE if they choose to commission one before going to market. In some deals, both happen: the seller's report speeds things up, and the buyer still does its own review.
Do I need a sell-side QoE?
It isn't required, but it can help, especially if you have many add-backs, inconsistent records, or expect institutional buyers. It lets you find and fix issues early, market your business on a defensible number, and move through due diligence faster.
What happens if a QoE finds problems?
It depends on the issue. Small findings may just be explained or documented. Larger ones can lower adjusted EBITDA, which can lead a buyer to reduce the price or change the deal terms. That's why finding issues yourself, before a buyer does, puts you in a stronger position.
How long does a QoE take?
Often three to six weeks once the accounting firm has everything it needs, depending on the size and complexity of the business. The biggest factor is usually how quickly the seller can provide records and answer questions.
Verified earnings make for smoother sales
A quality of earnings report isn't something to fear. It's a way for both sides to agree on what your business really earns. Buyers use it to confirm their offer. Sellers who prepare for it, or commission their own, go to market with numbers that hold up and fewer surprises along the way.
Start with clean books, documented add-backs, and a clear picture of your working capital. For the bigger picture, see our guide on how to value and sell your business, and for how your earnings are calculated in the first place, see SDE vs. EBITDA.
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Notice: For general educational and informational purposes only; not to be relied upon as financial, tax, or legal advice. Financial decisions carry inherent legal, tax, and other risks. Past performance is not a guarantee of future results. Use of this content creates no relationship with us, and we are not liable for any losses or damages from your use of this information. ANY WARRANTIES, EXPRESS OR IMPLIED, ARE HEREBY DISCLAIMED. You use this content at your own risk.
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