Quality of Earnings Report: What Buyers Discover Before a Sale

Last Updated: March 2026

A quality of earnings report (QoE) is an independent financial analysis performed during M&A due diligence that examines whether a seller’s reported earnings accurately reflect the true, recurring economic performance of the business. Rather than accepting management’s reported EBITDA at face value, the QoE analyst identifies one-time items, owner adjustments, accounting policy changes, revenue timing issues, and other factors that inflate or distort the headline number. Sofer Advisors, led by David Hern CPA ABV ASA, provides quality of earnings analysis and business valuation support for M&A transactions, giving buyers and sellers a credentialed, defensible view of normalized earnings before a deal closes.

The quality of earnings report has become a standard deliverable in middle-market transactions above $2 million in enterprise value, and increasingly for smaller transactions where buyers use SBA financing or seek bank debt. A deal that closes without a QoE — or with a weak one — often results in post-closing purchase price adjustments, earnout disputes, or outright litigation when buyers discover that the earnings they paid for never existed. Understanding what a quality of earnings report examines, who pays for it, and how to use its findings is essential for any business owner preparing to sell and any buyer conducting serious due diligence.

Key Takeaways

  • A quality of earnings report examines the sustainability, accuracy, and reliability of a seller’s earnings by recasting reported EBITDA to remove non-recurring items, owner benefits, and accounting anomalies that inflate or distort the true run-rate.
  • The adjusted EBITDA produced by a QoE becomes the denominator in the purchase price multiple — meaning a $200,000 difference in adjusted EBITDA can translate to a $1,000,000 or more difference in purchase price at a 5x multiple.
  • Buy-side QoE reports are ordered by buyers to protect against overpaying; sell-side QoE reports are ordered by sellers before going to market to strengthen credibility, accelerate diligence, and reduce price renegotiation risk.
  • A quality of earnings report is not a financial audit — it does not provide an audit opinion, test internal controls, or satisfy GAAP attestation standards, but it goes deeper than a compilation or review in its scrutiny of earnings quality.
  • QoE reports typically cost $15,000 to $50,000 for middle-market transactions, with scope and fee driven by company size, revenue complexity, number of accounting periods reviewed, and deal timeline urgency.

A quality of earnings report reveals what the seller’s financial statements do not: whether the reported EBITDA is real, recurring, and transferable to a new owner. Buyers who skip this step discover the gap post-closing through earnout disputes, post-closing adjustments, or litigation. Sellers who go to market without a sell-side QoE allow buyers to define the earnings narrative — and buyers are not motivated to find adjustments that increase the price. QoE providers including FTI Consulting, Lincoln International, and Kroll have made this analysis standard practice in middle-market M&A. The single most effective way for a seller to preserve purchase price at closing is to control the QoE narrative before going to market.

What Does a Quality of Earnings Report Examine?

A quality of earnings analysis reviews three to five years of historical financial statements to answer a single core question: how much of this company’s reported EBITDA is real, recurring, and transferable to a new owner?

The report works through a systematic set of adjustments. Revenue adjustments identify non-recurring customer orders, one-time contract termination payments, channel stuffing at period-end, or timing differences that moved revenue into the period under review but will not recur. Expense adjustments strip out owner compensation above market replacement cost, personal expenses run through the business, one-time professional fees for the transaction itself, and non-recurring costs that would not continue under new ownership.

Working capital analysis examines whether the company has been managing its accounts receivable, accounts payable, and inventory in a way that temporarily improves cash metrics ahead of a sale. A seller who stretched payables or accelerated collections to inflate a trailing-twelve-months snapshot will be identified during QoE review. The report also analyzes normalized capital expenditures versus maintenance capex, customer concentration, and the health of any deferred revenue or contract liabilities on the balance sheet.

The output of this process is an adjusted EBITDA figure that the QoE analyst believes reflects the true, sustainable earnings power of the business. This adjusted number — not the seller’s reported EBITDA — becomes the basis for the purchase price multiple negotiation.

What Is Adjusted EBITDA in a QoE Report?

Adjusted EBITDA is the central output of the quality of earnings process. It starts with the company’s reported EBITDA and applies a series of documented add-backs and adjustments to produce an earnings figure that reflects what the business will realistically earn under normal operations going forward.

Common add-backs that increase adjusted EBITDA include owner’s salary above market replacement cost (the amount paid to the owner above what a hired manager would receive), personal vehicle expenses, personal travel, family member compensation above market, one-time legal settlements, and non-recurring professional fees tied to the transaction. Common deductions that decrease adjusted EBITDA include below-market rent paid to a related party (which will normalize to market rent post-closing), one-time contract wins that will not recur, and revenue recognized under favorable accounting timing that understates true cost.

The difference between reported EBITDA and adjusted EBITDA is where deals are won and lost. A business reporting $1,500,000 in EBITDA may have a defensible adjusted EBITDA of $1,200,000 after removing unsustainable items. At a 5x multiple, that $300,000 difference represents $1,500,000 in purchase price. Buyers who accept reported EBITDA without scrutiny pay for earnings that will not materialize post-closing.

Sofer Advisors’ quality of earnings work identifies these adjustments with the methodology and documentation that supports the valuation conclusion, giving buyers a defensible earnings baseline for purchase price and deal structure.

What Is the Difference Between a QoE Report and a Financial Audit?

The quality of earnings report and the financial audit serve fundamentally different purposes and produce different types of assurance.

A financial audit, performed under GAAS by a licensed CPA firm, provides an opinion on whether financial statements are presented fairly in all material respects in accordance with GAAP. Auditors test internal controls, verify account balances, confirm existence of assets, and check transaction completeness. The audit opinion protects third-party stakeholders — lenders, investors, regulators — against material misstatement.

A quality of earnings report provides no audit opinion and does not attest to GAAP compliance. What it does instead is analyze whether reported earnings reflect economic reality from the perspective of a buyer considering an acquisition. A QoE may review the same financial statements as an auditor but asks entirely different questions: Are the earnings recurring? Are they sustainable? Do they reflect what the business will actually generate for the acquirer?

In practice, many acquisition targets have audited financials that still contain significant QoE adjustments. An audit can confirm that revenue was recognized in accordance with the company’s accounting policies, while a QoE analyst simultaneously concludes that those policies accelerated recognition and overstated the sustainable run-rate. The two conclusions are not contradictory — they serve different analytical purposes.

Feature Financial Audit QoE Report
Purpose GAAP compliance assurance Normalized earnings for M&A
Output Audit opinion Adjusted EBITDA + findings memo
Standards GAAS (auditing standards) CPA/analyst judgment, no GAAS
Tests Internal controls, existence, completeness Recurrence, sustainability, trend
Timeline 4-8 weeks typical 2-4 weeks typical
Who orders Company (for lenders/investors) Buyer or seller (for deal purposes)

What Is a Sell-Side vs Buy-Side Quality of Earnings Report?

Quality of earnings reports are prepared from either a buyer’s or a seller’s perspective, and each serves a distinct strategic purpose in a transaction.

A buy-side QoE is ordered by the acquirer during due diligence. The buyer engages an independent CPA or advisory firm to scrutinize the target’s financials before a letter of intent is signed or before closing. The goal is to identify misrepresentations, unsustainable earnings adjustments, and hidden liabilities before the purchase price is locked in. Buy-side QoE findings frequently lead to purchase price reductions, earnout provisions, or deal abandonment.

A sell-side QoE is ordered by the selling company’s owner or their investment banker before the business is taken to market. The seller proactively identifies and normalizes adjustments so that potential buyers receive a clean, defensible earnings analysis from day one. This approach has three strategic benefits: it demonstrates sophistication and transparency that attracts institutional buyers and private equity, it accelerates due diligence timelines by providing documentation buyers would otherwise have to produce themselves, and it reduces the likelihood of a last-minute price renegotiation when buyers conduct their own QoE and discover unexpected adjustments.

Sofer Advisors provides both buy-side and sell-side QoE support, working alongside the transaction team to produce a normalized earnings analysis that holds up under third-party scrutiny and supports the negotiated purchase price.

Who Pays for a Quality of Earnings Report?

In a buy-side engagement, the buyer pays for the quality of earnings report as part of the due diligence budget. Buy-side QoE fees are treated as a transaction cost and are typically absorbed by the buyer’s firm or fund.

In a sell-side engagement, the selling company or its owner pays for the report as a transaction preparation cost. While this represents an upfront cash outlay of $15,000 to $50,000, sell-side QoE reports frequently preserve far more value than they cost. A seller who can show buyers a credentialed, independent QoE with clean adjusted EBITDA documentation tends to command stronger purchase price multiples and face less renegotiation at closing.

For SBA-financed acquisitions, the lender often requires a QoE as a condition of loan underwriting. In these cases, the cost may be split between buyer and seller or absorbed by the party with the most interest in keeping the deal alive.

Frequently Asked Questions

What is a quality of earnings report?

A quality of earnings report is an independent financial analysis that examines whether a business’s reported earnings accurately reflect its true, recurring economic performance. It normalizes EBITDA by removing one-time items, owner adjustments, accounting timing differences, and other distortions, producing an adjusted EBITDA figure that a buyer can rely on for pricing and deal structure. It is standard practice in middle-market M&A due diligence and increasingly required in SBA-financed transactions above $2 million in enterprise value.

How much does a quality of earnings report cost?

A quality of earnings report typically costs $15,000 to $50,000 for middle-market transactions, with the fee driven by company size, revenue complexity, number of years under review, and timeline urgency. Smaller transactions or companies with simple financials may be analyzed for $10,000 to $15,000. Larger transactions with complex revenue recognition, multiple entities, or international operations can cost $50,000 to $100,000 or more. The cost of a QoE is a fraction of the deal value it protects — a $25,000 report on a $5,000,000 acquisition is less than 0.5% of the purchase price.

Who pays for a quality of earnings report — buyer or seller?

In a buy-side engagement, the buyer pays for the quality of earnings report as a due diligence expense. In a sell-side engagement, the seller pays for the report as a transaction preparation cost, typically before taking the business to market. SBA lenders often require a QoE as a loan condition, in which case the cost may be shared or absorbed by the party most motivated to close the transaction. Sell-side QoE reports typically cost the seller less than the purchase price protection and multiple preservation they deliver.

What is the difference between a QoE report and a financial audit?

A financial audit provides an opinion on whether financial statements are presented fairly under GAAP. A quality of earnings report examines whether reported earnings are sustainable and accurately reflect the business’s true economic performance from a buyer’s perspective. An audit confirms compliance with accounting standards; a QoE analyzes whether those standards were applied in a way that produces recurring, transferable earnings. A business can have clean audited financials and still require significant downward QoE adjustments that reduce the purchase price multiple basis.

What is a sell-side quality of earnings report?

A sell-side quality of earnings report is ordered by the selling company’s owner or investment banker before the business is taken to market. The seller proactively normalizes earnings adjustments and presents buyers with a clean, independent earnings analysis from day one. Sell-side QoE reports reduce due diligence timelines, attract institutional buyers who require credible financial documentation, and minimize the risk of last-minute price renegotiations when buyers conduct their own analysis. They signal seller sophistication and are standard practice in transactions handled by experienced M&A advisors.

What is adjusted EBITDA in a QoE report?

Adjusted EBITDA is the normalized earnings figure produced by a quality of earnings analysis after removing non-recurring items, owner benefits, accounting timing differences, and other distortions from reported EBITDA. Common add-backs include owner compensation above market replacement cost, personal expenses run through the business, and one-time costs that will not recur post-closing. Common deductions include below-market related-party rent and one-time revenue that will not recur. Adjusted EBITDA is the figure buyers use to determine the purchase price at the agreed multiple, making accuracy essential to both parties.

Do I need a QoE report to sell my business?

Not every transaction requires a formal QoE report, but any business with $1 million or more in EBITDA or enterprise value above $3 million will benefit significantly from one. Buyers backed by private equity, strategic acquirers, or institutional lenders will either conduct their own QoE or require access to seller-prepared analysis. Businesses with owner-operated expense structures, related-party transactions, multi-year revenue arrangements, or complex capital expenditure patterns present the highest QoE adjustment risk and the most to gain from pre-sale normalization. Sellers who go to market without a QoE give buyers the power to define the adjusted earnings narrative at closing.

What does a QoE report typically find in a closely held business?

The most common findings in closely held business QoE reviews include owner compensation significantly above market replacement cost, personal vehicle and travel expenses run through the company, family member salaries above market, below-market rent paid to a related-party entity owned by the seller, one-time professional fees tied to the transaction, and customer concentration risk that a buyer would consider when applying a multiple. Revenue timing issues — particularly end-of-period billing acceleration or deferred revenue understatement — are also frequently identified. These findings can produce adjusted EBITDA that is both higher and lower than reported, depending on the direction of the distortions.

How long does a quality of earnings report take?

A quality of earnings report typically takes 2 to 4 weeks from the time the seller provides complete access to financial records, accounting systems, and management for interviews. Complex transactions with multiple entities, international operations, or unusual revenue recognition may require 4 to 6 weeks. Buy-side QoE reports are often on compressed timelines of 2 to 3 weeks due to deal urgency. Sell-side reports can be prepared on a longer timeline of 3 to 5 weeks before the business is taken to market. Sofer Advisors operates under a next business day response policy and can scope QoE engagements for your specific transaction timeline.

How do QoE findings affect the purchase price?

QoE findings directly affect purchase price when adjusted EBITDA differs materially from reported EBITDA. A downward QoE adjustment of $200,000 in a transaction applying a 5x multiple reduces the purchase price by $1,000,000. Buyers use QoE findings to negotiate purchase price reductions, insert earnout provisions tied to post-closing performance, require seller indemnification for specific earnings risks, or in significant cases, walk away from the transaction entirely. Sellers with clean QoE results are in a stronger negotiating position and face less renegotiation risk at closing.

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Executive Summary

A quality of earnings report examines whether a business’s reported earnings are sustainable, recurring, and accurately reflect what a buyer will actually receive post-closing. The adjusted EBITDA it produces becomes the foundation of purchase price negotiations — a material difference between reported and adjusted earnings can change a transaction value by millions. QoE reports come in buy-side and sell-side formats, each serving distinct strategic purposes. They differ fundamentally from financial audits, which test GAAP compliance rather than earnings sustainability. Costs range from $15,000 to $50,000 for middle-market transactions, representing a fraction of the deal value they protect. Sellers who go to market with a credentialed sell-side QoE accelerate diligence, preserve multiple value, and reduce the risk of price renegotiation at closing.

What Should You Do Next?

Sofer Advisors provides quality of earnings analysis and business valuation services for M&A transactions, buy-sell agreements, and pre-sale financial preparation. David Hern CPA ABV ASA brings 15+ years of valuation experience and dual ASA and ABV accreditations to every engagement, producing normalized earnings analysis that supports the purchase price and withstands buyer scrutiny. With 180+ five-star Google reviews, Inc. 5000 recognition in 2024 and 2025, and a next business day response policy, Sofer Advisors is the firm M&A advisors and business owners trust for credentialed, defensible financial analysis.

SCHEDULE A CONSULTATION to discuss your transaction’s quality of earnings needs and how Sofer Advisors can support your due diligence process.

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About the Author

This guide was prepared by David Hern CPA ABV ASA, founder of Sofer Advisors – a business valuation firm headquartered in Atlanta, GA serving clients across the United States. David holds dual accreditations as an Accredited Senior Appraiser (ASA) and is Accredited in Business Valuation (ABV), credentials recognized by the IRS, SEC, and FINRA. He also holds the Certified Exit Planning Advisor (CEPA) designation. With 15+ years of valuation experience, David has served as an expert witness in 11+ cases across multiple jurisdictions and built Sofer Advisors into an Inc. 5000-recognized firm with 180+ five-star Google reviews. The firm’s full W2 employee team maintains subscriptions to all major valuation databases and operates under a next business day response policy.

For professional business valuation services, visit soferadvisors.com or schedule a consultation.

This article provides general information for educational purposes only and does not constitute legal, tax, financial, or professional advice–consult qualified professionals regarding your specific circumstances.